Bond Investors Eye Inflationary Developments in Asia

Asia’s economies will face differing price pressures throughout 2024. To understand why, we take a closer look at the region’s inflationary drivers.

Asia displays rich diversity in terms of economic development and the composition of its different markets. This heterogeneity is also reflected in a broad range of inflationary outlooks for 2024 that are being closely monitored by the region’s bond investors.

Drilling deeper and certain factors impact all economies, with energy costs being a good example. Yet, on a more nuanced level, the picture diverges. For instance, developed economies may suffer more when labor markets are tight, as this can trigger sharp rises in services-related price inflation. Meanwhile, developing economies are less challenged by the knock-on effects of manpower shortages.

Similarly, spikes in food prices can contribute significantly to headline inflation, but the impact is felt differently. Advanced economies like Singapore are generally less affected because these basics represent a relatively smaller part of the grouping of goods and services used to calculate inflation. Conversely, rice and related products comprise a quarter of the consumer inflation basket in the Philippines.¹

Geopolitical Tensions Could Cause Future Trade Disruption and Price Spikes

As affluence grows across Asia, policymakers are increasingly mindful of how geopolitical events could impact food prices, but the picture is mixed. The continuing conflict between Russia and Ukraine could further disrupt wheat exports, while escalating tensions between Israel and its neighbors are less likely to be problematic, given there is little direct trade between the affected economies in the Middle East and Asian markets.

At the same time, the potential for more significant trade route disruption and increases in oil prices owing to an uptick in global tensions could see increased shipping costs between Asia and Europe. In its December 2023 outlook, the Asian Development Bank observed that weather or war-related food shortages could cause prices to increase in 2024.²

Energy costs are another underlying theme in play. Indonesia is now the world’s largest exporter of thermal coal and traditionally a large oil producer.³ In contrast, markets like China and the Philippines are more exposed to elevated oil prices because they must import a large amount of their needs.⁴ In the background, the International Monetary Fund (IMF) is warning that escalating tensions across the Middle East could lead to higher energy costs.⁵

Changing Weather Conditions Could Put Upward Pressure on Prices

Drier conditions have led to low soil moisture levels in Thailand and India, which are expected to reduce the average off-season rice harvest by 20%. In fact, rice prices at major Asian hubs rose by 30-40% in 2023. This was partially driven by India restricting its exports to ensure sufficient domestic supply.⁶ Major rice importers, such as Indonesia and the Philippines, must obtain adequate supplies to avoid the prospect of local price spikes.

China and Thailand – The Complexities of Inflation

In China, headline consumer inflation for the year to December 2023 remained in positive territory, but only just (0.2%). This compares to the government’s target of 3%.⁷ This deflationary potential is caused by various factors, including lower food prices and a weak labor market, with wages actually falling by 1.3% in 2023.⁸ The soft property sector may also be responsible for some downward pressures, with new-home prices slipping by 0.2% in the December 2023 reading.⁹

In Thailand, there is a slight disconnect between fiscal and monetary policy when it comes to countering inflation. The government has subsidized electricity prices to reduce pressure on businesses and consumers¹⁰ while announcing it will issue a digital wallet program worth around US$14 billion in May 2024 to reduce pressure on households.¹¹ However, cash handouts are often quickly spent and are seen as contributing to inflationary pressures – running counter to the objectives of Thailand’s central bank.

China and Thailand's experiences show the complexities of dealing with inflation. Remaining with Thailand, a good example of what happens when political desires meet central bank realities, occurred in early February 2024. The prime minister asked the central bank to reduce interest rates after the release of softer inflationary data.¹² The central bank resisted by pointing out that core price rises, which remove volatile food and energy costs from the index calculation, remained in positive territory.

Asia’s Economic Prospects Remain Bright

Many Asian markets have a more robust economic outlook than emerging markets elsewhere in the world. Take Argentina as an example: inflation there recently rose to over 200%, with prices gaining 25% in December 2023 alone. While Argentina is an extreme case, inflation in other Latin American and many African markets¹³ is generally higher than in Asia.¹⁴

The IMF noted in its January 2024 World Economic Outlook update that it had increased its growth forecasts for Asia in 2024. This is mainly due to the improving growth prospects of India and China. The IMF also sees an opportunity for monetary policy easing later in the year, provided policymakers remain firm on their commitments to combating inflation.¹⁵