Economic growth at 7.8%, the rise in oil prices slows down: S&P Global Ratings

Rising oil prices could dampen economic growth and lead to large current account (CAD) deficits in major energy-importing countries like India, S&P Global Ratings said on Wednesday.

The rating agency pegged India’s economic growth at 7.8% for FY23. It said high inflation, weaker demand and heightened uncertainty stemming from the Russia-Ukraine conflict could slow economic and fiscal recoveries far more than currently expected for many countries.

S&P revised its 2022 average Brent price forecast to $85 a barrel from its previous assumption of $75. Crude oil prices are on a boil, with Brent crude hitting $131.31 on Wednesday.

The rating agency said that for many Asia-Pacific economies that are net energy importers – such as India, the Philippines, South Korea, Taiwan and Thailand – energy prices higher can trigger a terms of trade shock.

“This would affect current account balances as well as real domestic consumption and investment,” he added.

S&P believes that increased market risk could also draw capital out of emerging Asian markets, affect currencies and increase funding costs.

“A widening conflict or new sanctions could push investors into safe haven positions, involving capital outflows from emerging markets, affecting assets and currencies,” he warned.

India is also vulnerable to a spike in retail inflation with significantly higher energy prices.

“Higher consumer price index (CPI) inflation would put a strain on monetary policy in India, South Korea, the Philippines, Singapore and New Zealand, where inflation in the CPI is of concern to central banks,” the rating agency said.

S&P now expects the US Federal Reserve to begin normalizing monetary policy faster than expected.

“This reflects higher and more persistent inflation than expected, with a larger demand-side component requiring a policy response. We now expect six rate hikes of 25 basis points each in 2022, followed by five more hikes in 2023. -2024. The Fed’s tapering of asset purchases is complete. We expect an announcement on the strategy to reduce the size of the balance sheet later this year,” he added.

The rating agency said external demand for the Asia-Pacific region will also weaken due to the current crisis.

“We expect this to be most evident in demand from Eastern Europe, the Middle East and Africa, where the economic effects of the Russian-Ukrainian conflict are likely to be greatest,” he added.

India Ratings and Research said Wednesday that rising crude oil prices could push India’s CAD to 2.8% of GDP, a 13-quarter high.

“Although the Omicron wave has subsided, geopolitical risks to the global recovery have increased due to the conflict. The direct effects of this conflict have driven up commodity prices and freight and transportation costs. Further, the rupee which averaged 75 against the dollar in February 2022 is expected to average around 76 in March 2022. of December 2021,” he added. .

India Ratings estimates that despite the adverse effects of the conflict, imports of goods should still recover.

This was due to the normalization of the national economy, rising commodity prices and the depreciation of the rupee, which pushed the merchandise import bill to over $166 billion in the fourth quarter of exercise 22.

“The FY22 merchandise import bill is estimated at a record high of over $606 billion. However, merchandise exports may be limited to $101.3 billion in the fourth quarter of FY22, pushing merchandise exports to $406 billion in FY22. As a result, the trade deficit Commodity is expected to reach $200 billion in FY22. In total, CAD is expected to reach over $25 billion in the fourth quarter of FY22,” he said.

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