Ukraine crisis fallout: Slower global economic growth, higher consumer prices in PH

Just as economies worldwide were rebounding from the slump inflicted by COVID-19, Russia’s invasion of Ukraine would slow down economic growth, trade, and jack up global oil prices, think tanks said.

In the Asia-Pacific region including the Philippines, still fragile economic recovery may be dampened by the war’s spillover effects on global supply of commodities, such that consumers should brace for higher prices of food items.

In a Feb. 25 report, investment banking giant Goldman Sachs noted that the Russian military’s move towards Ukraine jacked up Brent crude oil prices above $100 per barrel last week, which it said will inflict near-term inflation pressures globally.

“For most of Asia, we think the main spillover from the conflict will be via higher commodity prices. We estimate that a 10-percent increase in oil prices driven by a supply shock would cut real GDP [gross domestic product] growth by 10-40 basis points (bps) and raise headline CPI [consumer price index] inflation by 30-50 bps in most Asian economies,” Goldman Sachs Economics Research said.

With economic reopening in full swing, the Philippines this year targets to grow its GDP — the total value of goods and services produced locally — by an ambitious 7-9 percent as follow-through to last year’s better-than-expected 5.6-percent expansion. The Philippine economy shrank by 9.6 percent in 2020 — its worst annual recession post-war — at the height of the most stringent COVID-19 lockdowns at the onset of the pandemic, which shed millions of jobs and shuttered hundreds of thousands of business.

It did not help that inflation, or year-on-year consumer price hikes, for the most part of 2021 rose above the government’s 2-4 percent target range deemed manageable and conducive to economic recovery, no thanks to expensive food, especially pork amid the prolonged African swine fever (ASF) crisis.

This year, the government sees inflation peaking in the second quarter but settling within the target band for the entire year.

“Inflation is seen to decelerate in early 2022 but could accelerate towards the upper end of the band in Q2 before moving back to within the target range. The initial deceleration of inflation is due mainly to negative base effects from the uptick in pork prices from the previous year. However, inflation is projected to accelerate slightly above the target range in the second quarter driven by elevated global oil and non-oil prices and positive base effects. Nonetheless, inflation is projected to decelerate back to within the target in the third and fourth quarters,” the Bangko Sentral ng Pilipinas (BSP) said in its monetary policy report, which was released before armed conflict erupted between Russia and Ukraine.

In a separate Feb. 25 report, UK-based think tank Oxford Economics said that “Asia’s weak economic and financial links with Russia and Ukraine mean that it is not as exposed as Europe and the US to the rapidly escalating conflict.”

Oxford Economics’ estimates showed that the Philippines’ imports from Russia were only less than 1 percent of total, while exports of Philippine-made goods to Russia were very small or about 0.1 percent of total.

However, Asia “will feel the consequences of rising energy prices and lower foreign demand,” Oxford Economics head of India and Southeast Asia economics Priyanka Kishore said.

“We estimate that Russia’s invasion of Ukraine will drag Asia Pacific’s real GDP growth around 0.15-percentage points (ppt) lower in 2022 than in our no-conflict baseline, while inflation could be pushed 0.4-ppt higher,” Oxford Economics said.

In the case of the Philippines, Oxford Economics estimates showed that higher oil prices would boost inflation by over 0.1 ppt, while foreign demand would be reduced by 0.3 percent.

Overall global growth would shed 0.2 ppt while worldwide inflation would go up by 0.7 ppt as a result of the Russia-Ukraine war, according to Oxford Economics.

Oxford Economics warned that “even after the general risk-off sentiment eases, concerns may persist” for Asian countries with “twin deficits” — a budget deficit and a current account deficit — like the Philippines, India and Indonesia.

The Philippines had been spending a bigger amount to fight the prolonged pandemic than the tax and non-tax revenues it collected amid the harder times, hence posting wider budget deficits during the past two years than the usual gap equivalent to 3 percent of GDP.

The national government expects to have ended 2021 with its largest-ever full-year fiscal deficit of P1.61 trillion, equivalent to 8.2 percent of GDP. To narrow this deficit as well as repay ballooning debt, the Department of Finance (DOF) was currently working on a fiscal consolidation plan, to be pitched to the next President, which will possibly include new or higher taxes as well as public expenditures priorities to spend the limited budget on more productive programs and projects.

The Philippines last year also swung back to a current account deficit as economic recovery meant the country had to spend more dollars to cover imports of raw materials and finished goods, unlike in 2020 when a slump in consumer spending accumulated foreign reserves. The current account deficit weakens the peso.

For London-based Capital Economics, “higher oil prices will keep energy price inflation in emerging Asia higher than we had previously envisaged” but the think tank expects central banks across the region, including the BSP, will keep record-low interest rates steady in the near term to support economic recovery.

“The main channel through which Asia will be affected by the crisis is higher oil prices. Brent crude oil is now trading at around $100 per barrel. We had been expecting oil prices to fall back steadily this year, but now believe that concerns about Russian supply will keep prices around this level over the next few months. If the situation were to escalate and Russia’s oil exports were choked off altogether, we could see oil prices trade in a range of $120–140 per barrel for most of the year,” Capital Economics senior Asia economist Gareth Leather said.

“Under the more extreme scenario, energy price inflation would rise over the coming months and remain elevated for most of 2022,” Capital Economics warned. “With inflation likely to remain higher for longer, the risks are now clearly on the upside.”

Just like other economic think tanks, Capital Economics was of the same view that “while there is likely to be further volatility over the coming weeks, Asia’s weak economic ties to Russia and Ukraine and strong external positions mean it is well placed to weather any further big shifts in global financial markets.”

Economists watching the Philippines shared the same concerns on upward pressures to domestic inflation if the Ukraine crisis dragged on for longer.

“The main inflationary impact of the Russia-Ukraine conflict is through higher commodity prices, particularly oil and wheat. If the conflict does not get resolved soon and consequently lead to elevated oil and wheat prices for the most part of 2022, then the average inflation for the year will be likely closer to our upside forecast of 4.1 percent,” Philippine National Bank (PNB) economist Alvin Arogo said.

“On the Ukraine crisis, higher oil prices will drive up local inflation and foment peso weakness as importers will need more foreign exchange to cover pricier oil.  A weaker peso foments higher inflation, causing a negative feedback with inflation edging higher and peso weakening further,” ING Philippines senior economist Nicholas Mapa said.

“While we don’t see significant disruption to oil supply in the near term as the Philippines has existing oil contracts and does not import oil directly from Russia or Ukraine, a prolonged conflict between Russia and Ukraine will weigh on the Philippines ‘ other trading partners, thus having a spillover effect on supply-chain and oil prices, putting upward pressure on inflation,” Moody’s Analytics associate economist Sonia Zhu said.

“Upside risks to global oil and food commodity prices from the heightened Russia-Ukraine conflict will mean an upside risk to the inflation outlook in the Philippines, too, as the country is a net importer of petroleum products and some food items. As guided by the BSP in its latest monetary policy report, a sustain uptrend in global oil prices above $95 per barrel, particularly if they surpass $110 per barrel, the nation’s headline inflation will exceed the central bank’s 2-4 percent target range,” noted Loke Siew Ting, vice president at Singapore-based United Overseas Bank (UOB).

“As the situation is still fluid, we think it’s too premature to assess the exact impact but we welcome the Philippine government’s proactive measure that was announced to mitigate the impact of rising oil prices on consumer price inflation for now. The government said it will provide P2.5-billion worth of fuel vouchers for qualified public transport and delivery services, as well as P500-million worth of fuel discounts for farm and fishery machinery operators,” she added.

UnionBank chief economist Ruben Carlo Asuncion said that “any further fireworks sparked by Ukraine-Russia tensions will cause oil prices to spike up including natural gas, which is bad for net oil importing emerging markets like the Philippines as such will spillover into more cost-push inflation for us.”

A prolonged war could also “cause the Philippine peso to weaken to 52:$1” such that the BSP “will adjust its intervention levels higher to allow the spot rate to absorb some of the external oil price shock,” Asuncion said. “The BSP will intervene and inject liquidity in the spot market and overnight peso markets to calm market fears and prevent any ‘hoarding.’ Amid these oil price shocks, the BSP will keep the policy rate unchanged,” he added.

Also, “a protracted conflict will stall any upbeat growth momentum,” such that “consumer and business sentiment will turn cautious and worry over the broadening of the conflict in Europe,” Asuncion warned.

On the flip side, Asuncion said expensive oil “may ease the budget deficit since the government will be able to collect more revenues from higher oil prices, but potential suspension of oil taxes may do otherwise.”

Barclays regional economist Shreya Sodhani said that inflation risk in the Philippines resulting from the Ukraine-Russia tensions “will come mostly from the dramatic increase in oil prices.”

“Imported inflation will also continue to be high as food costs are rising globally,” she added.

RELATED STORY

Oxford Economics: Household consumption in PH to recover slower than most Asian peers