Soaring energy prices could hit growth, consumption, S&P warns

Large net energy importers like India could face ‘terms of trade’ shock

March 09, 2022 07:32 pm | Updated 07:32 pm IST - NEW DELHI

An electronic sign on a building shows the price of Brent Crude oil in Hong Kong on March 9, 2022. (Photo by Peter PARKS / AFP)

An electronic sign on a building shows the price of Brent Crude oil in Hong Kong on March 9, 2022. (Photo by Peter PARKS / AFP) | Photo Credit: PETER PARKS

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

Higher retail inflation would also strain monetary policy and may dampen economic growth and stress some bank borrowers in countries like India, the rating agency said in a note on the Ukraine conflict’s impact on Asia, linked to countries’ energy profiles.

“For Asia-Pacific, the biggest risk of 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 had limited ‘direct exposure’ to Russia or Ukraine in terms of revenues, investments or supply chains.  

A widening of the conflict or further sanctions, however, could ‘seriously damage investor sentiment’ and push them to seek haven options, resulting in capital outflows from emerging markets, and hitting assets and currencies, S&P said.

“Substantially higher energy prices and volatility will likely strain the currencies and asset markets of many Asia-Pacific countries. This pressure will be strongest where higher energy prices pressure inflation targets — such as India, the Philippines, Korea, and Thailand,” it warned, adding that this could also lead to a sizeable current account deficit for India.

“These risks emerge as the U.S. Federal Reserve leads several major central banks to raise policy interest rates,” S&P observed. “Traders would likely react unfavourably to large current account deficits in emerging markets. Obvious examples are India and the Philippines,” it added.

Higher energy prices can trigger a terms-of-trade shock, where import prices rise faster than export prices, for net energy importers like India, S&P noted. This, it added, would hit current account balances and real domestic consumption and investment.

The risks to growth and inflation could slow sovereign credit improvements, and although S&P expects regional GDP recoveries to continue, the conflict would slow the pace of rebound. “Governments should still be able to meaningfully rein in fiscal deficits, although a full return to pre-COVID fiscal performances will take longer,” it concluded.

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