Ukraine conflict to strain Asian economies

1 Apr 22

Soaring inflation stemming from Russia’s invasion of Ukraine, could force Asia Pacific to issue more debt to fund increased spending, putting pressures on finances, according to ratings agency S&P.


Ukraine conflict. Image © SV_ZT/Shutterstock

Import costs will rise for many Asian economies, and it is likely these costs will hit the economic growth and fiscal performances of nations, the agency said in a report last week.

It said that inflation rises will also impact on borrowing, with some sovereigns reporting large increases on interest rates, including India, Vietnam and the Philippines.

The report said: “Higher inflation directly affects sovereign-debt metrics.

“Rising rates raises the interest payments on government debt, outpacing increases in revenue.

“It is also possible that higher inflation could raise the cost of budgetary spending to force governments to issue more debt.”

Financing costs could rise further if some institutional investors become more risk averse, and reduce their lending, S&P said.

This would hit the region's economic growth and fiscal performance, as some economies already have weak debt metrics, which would be impacted further by more expensive borrowing, the report said.

The majority of the region are also net importers of grains, oil and natural gas, which Russia and the Ukraine are large exporters of, greater costs are likely to put pressure on already weak economies, the report said.

The sovereigns that could be most affected by the increase in energy prices are likely to be, Sri Lanka and Pakistan, which have a large reliance of imported energy, S&P said.

Sri Lanka is especially vulnerable because it imports about half the energy it uses, and was under strong external financing pressures even before the recent surge in oil prices, the report added.

Elsewhere, governments could be forced to expand existing subsidies, to help offset the rise in price on households, S&P said.

India could face higher spending particularly food and fertiliser, which the government subsidises, if those markets are interrupted for an extended period, the agency said.

Higher prices could also undermine buoyant consumption trends in India, moderating the economy's otherwise healthy recovery from Covid-19, report said.

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