ASEAN region feels Ukrainian economic pain

The international response to Russia’s invasion of Ukraine is certain to have a significant negative impact on a global economy only just recovering from the Covid-19 pandemic, which has cost more than $12.5 trillion worldwide to date, according to the International Monetary Fund has cost and killed more than 6 million people.

High prices for oil and wheat and many other commodities will reduce consumer demand, while disruptions to supply trains and material shortages will hurt production and airline disruptions will delay tourism revivals in some regions.

For Southeast Asia, the more immediate impact will be very different. Perhaps best positioned is Indonesia, whose oil imports are roughly offset by gas exports and whose large imports of wheat and other food products are more than offset by massive palm oil exports. Additionally, Indonesia is benefiting from buoyant copper and coffee and nickel prices have soared due to the disruption in Russian supplies.

Coal prices have also recovered dramatically, a boon for Indonesia, which exported nearly 315 million tons in 2021. The tourism sector is also beginning to recover from Covid, up 13.62 percent year-on-year in January as restrictions were eased. Indonesia already had a current account surplus before the Ukraine war and should therefore be able to support the recovery in domestic demand despite higher inflation.

Like Indonesia, Malaysia will benefit from rising palm oil and rubber prices and will be a net exporter of hydrocarbons, although it is also a major importer of other foods, including wheat. The revival of tourism should also have a supporting effect.

At the other end of the scale is the Philippines with its almost total dependence on imported oil and also large imports of wheat for human consumption and corn and soybeans for poultry and livestock. It is difficult to foresee that profits from transfers or at least short-term income from business process outsourcing will be offset. Tourism is likely to recover from Covid but electronics exports are likely to be flat at best due to aggregate global demand.

Thailand is also heavily dependent on oil imports, but this should more than be offset by rising prices for its agricultural exports. Export manufacturers and domestic demand are being dampened by price hikes and potential supply chain disruptions, but tourism is beginning to rebound from the pandemic, which may be spearheaded by visitors from Saudi Arabia and other oil exporters — though the once-thriving Russian business looks dead for now. Thailand, which had expected more than a million Russian tourists a year in its efforts to recover from the coronavirus, saw arrivals fall to almost zero. The government has officially taken a neutral position in the war.

Vietnam is now partially dependent on imported oil and gas, and higher prices for these are unlikely to be offset by higher prices for its own key commodity exports of rice, coffee and seafood. However, any weakness in foreign demand for manufactured goods should be offset by the gradual shift of investment from China to Vietnam.

Singapore could suffer from a drop in international financial business caused by freezing Russian and other assets – although it is also benefiting from an exodus from Hong Kong caused by Covid and political troubles. Tourism should also be revived.

However, if we look further ahead, the combination of Covid supply disruptions and now a war of unknown length that has created a new ‘Iron Curtain’ across Europe is sure to result in a decrease in reliance on offshore manufacturing and thus result from foreign investment in countries that do not provide significant domestic demand growth. This is where demographics come into play and could hurt Thailand in particular, whose years of low fertility rates prompted the government recently to talk about special measures to encourage childbirth.

On the political front, Singapore has been the most outspoken in its criticism of the invasion, aware that small countries need to be protected from larger neighbors. The Philippines and Indonesia have criticized the invasion, albeit in muted terms. Malaysia’s position was, as usual, a blank stare. Vietnam has remained silent, on the one hand because it depended on Russia for many of its military needs, and also recalled Russian support during the Vietnam War against the Americans. On the other hand, it’s obviously nervous about the principle of regaining a lost empire, and sees parallels with China’s invasion of Vietnam in 1979, when the Vietnamese fought the far larger Chinese military to a standstill.

ASEAN issued a typically empty statement, and Myanmar’s military government was the only one in the region to express support for Russia. That said a lot about the two.

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