CURRENCY PRESSURES
While price caps may delay macroeconomic impacts, allowing full pass-through to retail prices will produce immediate inflationary and currency pressures. However, these pressures can be mitigated through different means. The Philippines’ central bank, Bangko Sentral ng Pilipinas, was forced to raise interest rates thrice, but it did not prevent the peso from falling to all-time lows.
Currency depreciation despite interest rate increases can raise inflationary expectations while dampening investment and consumption, thus increasing the risk of stagflation. Like the Philippines, Singapore also allowed full pass-through to retail prices, but managed inflation through currency appreciation by employing its substantial foreign exchange reserves.
Myanmar’s political crisis and Laos’ debt crisis are impairing their ability to mitigate the macro impacts of the fuel price shock, although increased demand for electricity associated with AI data centres is a partial offset for Laos.
Cambodia’s low debt levels and widespread dollarisation are acting as inflation buffers, but its border closure with Thailand is affecting fuel and fertiliser supplies, as well as cross-border tourism flows, compounding an international travel slowdown induced by higher jet fuel prices.
The Philippines and the above LDCs are suffering the worst macroeconomic and social impacts from the Strait of Hormuz closure. It is no coincidence that these countries are also the most economically vulnerable, with limited financial resources and the highest poverty rates.
The longer the shock persists past the seven-month mark, the greater the risk of stagflation, with irreversible effects on the welfare of the poor. These countries, along with Indonesia, face rising fiscal vulnerability and even the risk of sovereign debt distress, which would further constrain their capacity to respond to evolving disruptions like the El Nino effects.
The Philippines is the most oil-dependent on the Gulf region, while the LDCs are exposed both directly and indirectly, through their dependence on third countries like Thailand for refined fuel. Although Thailand and Vietnam are also heavily reliant on the Gulf region, an investment boom driven by new technologies and shifting geopolitics is outweighing the negative growth impacts from the conflict.
Beyond the buoyant growth numbers, the real effects of current crises are mainly social and distributional, with especially adverse impacts on the vulnerable in poor countries.
Jayant Menon is a Visiting Senior Fellow in the Regional Economic Studies Programme at the ISEAS – Yusof Ishak Institute. This commentary first appeared on ISEAS – Yusof Ishak Institute’s blog, Fulcrum.