Rising energy prices could hamper growth and consumption, S&P warns

The rise in energy prices due to the Russia-Ukraine conflict could trigger a terms-of-trade shock for big net energy importers like India, leading to a hit on the current account and on domestic consumption and investment, S&P Global Ratings said next Wednesday.

Higher retail inflation would also weigh on monetary policy and could dampen economic growth and weigh on some bank borrowers in countries like India, the rating agency said in a note on the impact of the Ukraine conflict on Asia related to the countries’ energy profiles.

“For the Asia-Pacific region, the biggest risk from the Ukraine conflict is market volatility and higher commodity prices; Emerging economies with large energy imports are most at risk,” it said, noting that the continent has limited “direct exposure” to either Russia or Ukraine in terms of revenue, investment or supply chains.

However, widening the conflict or further sanctions could “seriously damage investor sentiment” and push them to seek safe havens, which could trigger capital outflows from emerging markets and hit assets and currencies, S&P said.

“Significantly higher energy prices and volatility are likely to weigh on the currencies and asset markets of many Asia Pacific countries. This pressure will be strongest where higher energy prices are putting inflation targets under pressure – like India, the Philippines, Korea and Thailand,” she warned, adding that it could also lead to a sizeable current account deficit for India.

“These risks arise when the Federal Reserve prompts several major central banks to raise interest rates,” S&P noted. “Traders would likely react negatively to large current account deficits in emerging markets. Obvious examples are India and the Philippines,” she added.

Higher energy prices can trigger a terms-of-trade shock for net energy importers like India, with import prices rising faster than export prices, S&P noted. This would affect current account balances as well as real domestic consumption and investment.

Risks to growth and inflation could hold back sovereign debt improvement and while S&P expects the regional GDP recovery to continue, the conflict would slow the pace of the recovery. “Governments should remain in a position to contain fiscal deficits in a meaningful way, although a full return to pre-COVID budgetary benefits will take longer,” she concluded.

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