Undoubtedly, inflation in Asia has been generally too high, with at least three ASEAN economies, namely Vietnam, Indonesia, and Philippines, recording doubled-digit price rises in June this year.
Vietnam led the pack with an inflation rate of 26.8 per cent, followed by the Philippines?f 11.4 per cent and Indonesia?fs 11 per cent, while Thailand?fs June inflation was 8.9 per cent. In addition, several central banks in ASEAN have been behind the curve with policy rates lower than their inflation rates. As a result, these central banks are expected to tighten their monetary policies by raising interest rates further and allowing their currencies to appreciate.
Rising energy and food prices have evidently increased inflationary pressures. Most importantly, crude oil prices have skyrocketed, setting a new record of US $147 per barrel in July. Since 2005, oil prices have started to climb from around US$40 per barrel, reaching the $60-80 range in 2007 and topping $100 this year. In short, oil prices have tripled over the past three years. According to Deutsche Bank Research, the price hikes have been driven by a demand boom, not a cut in supply as was the case in the 1970?fs. This increasing demand is a key indicator of high economic growth rates during the past several years, especially in emerging markets in Asia.
However, the global economy has been less affected by this round of oil price hikes when compared to the 1970?fs oil shock largely due to three factors. First, there has been a higher absorption of oil exporting countries?f increased revenues (petro-dollar recycling). Second, energy efficiency has risen over the past decades. Third, the share of oil in global trade has decreased significantly since the 1970?fs.
In terms of global growth, Asian economies continue to be dominant players. China and India are projected to lead the pack with average growth rates of 8 and 9.5 per cent per annum, respectively, during 2008-2011, according to Deustche Bank Research. As for ASEAN economies, Vietnam?fs growth for the same period is projected to reach 7.5 per cent per annum, followed by Indonesia?fs 6 per cent, the Philippines?f 5.5 per cent, Singapore?fs 5 per cent, Malaysia?fs 4.5 per cent.
Despite the relatively strong growth projections, inflation started to rear its ugly head early this year, posing a new challenge to the management of macro-economies. In response to the rising inflation expectation, Thailand?fs Monetary Policy Committee (MPC), for example, decided to raise the key policy interest rate 25 basis points to 3.5 per cent in July this year. The move came ahead of the July monthly inflation of 9.2 per cent, a decade high. In addition, the MPC raised the policy interest rate again on August 27 by another 25 basis points to 3.75 per cent, compared to 4.25 per cent in Europe and only 2 per cent in the US.
In July, the Thai government also cut the excise tax rate on gasoline, diesel, and gasohol (a blend of gasoline and ethanol) by Bt3-4 per liter to alleviate hardship caused by skyrocketing oil prices. The government said such a measure, which would be in effect for six months from August 2008 to January 2009, would also help ease inflationary pressures in coming months. Moreover, Thailand requires more prudent economic management as it faces the challenge of private consumption and investment growth moderating sharply since 2005. Over the past 3-4 years, the export sector has been the only engine of growth.
As for other ASEAN economies, Malaysia, for example, decided to remove its petrol subsidy recently in a bid to encourage its citizens to be more energy efficient amid the oil price up-trend.
In Indonesia, a food crisis was looming due to shortages and sharp price increases of staple food. The Philippines, meantime, called for leaders of Association of South-East Asian Nations (ASEAN) to convene an emergency meeting to discuss the growing food shortages in the region. ASEAN groups together Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma, the Philippines, Singapore, Thailand and Vietnam.
Widespread promotion of bio-fuels via government mandates and subsidies in the wake of skyrocketing oil prices is also blamed for contributing to the global food crisis. In Thailand, ethanol, which is made from sugarcane and tapioca, has been sanctioned by the government with a generous tax incentive to be an alternative fuel in the next few years. In general, the issue of energy and food security has become further complicated and intertwined due to the boom in bio-fuels amid rising oil and commodity prices.
In the case of Thailand, energy security is undoubtedly a bigger challenge than the food security largely because the country is both a net oil importer and net food exporter. As a net oil importer, the negative impacts of oil price hikes on the economy, consumers, industries and businesses have been inevitable and enormous. In the short term, little could be done except cutting down on energy consumption. In the medium term, various tax and other incentives will be needed to promote alternative and indigenous sources of energy. As a net food exporter, Thailand has enjoyed increased export earnings due to price rises for its key farm commodities such as rice. In addition, certain crops which can be used as raw materials for bio-fuels such as sugar cane and tapioca are also among the gainers.