ASEAN Region Feels Ukrainian Economic Pain
Some countries will be hurt less than others
The international response to Russia’s invasion of Ukraine is sure to have a major negative impact on a world economy only just emerging from the Covid-19 pandemic, which globally so far has cost more than US$12.5 trillion according to the International Monetary Fund and killed more than 6 million people.
High prices for oil and wheat many other commodities will cut consumer demand, while supply train disruptions and materials shortages will hurt production and airline disruptions in some regions will delay the revival of tourism.
For Southeast Asia, the more immediate impacts will vary widely. Perhaps the best positioned is Indonesia, whose imports of oil are roughly balanced by gas exports, and whose large imports of wheat and other foods are more than balanced by massive palm oil exports. In addition, Indonesia is gaining from buoyant copper, and coffee prices and nickel prices have gone through the roof due to the cut-off of Russian supplies.
Coal prices have also staged a dramatic recovery, a benefit to Indonesia which exported nearly 315 million tonnes in 2021. The tourist sector is also beginning to recover from Covid, rising by 13.62 percent in January year-on-year as restrictions eased. Indonesia had a current account surplus even before the Ukraine war so should be able to support domestic consumer demand recovery despite higher inflation.
Like Indonesia, Malaysia will benefit from rising palm oil and rubber price rises as well as being a net exporter of hydrocarbons, though it is also a significant importer of other foods including wheat. Tourism revival should also provide support.
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 hard to see that there will be any offsetting gains either in remittances or, at least in the short term, earnings from Business Process Outsourcing. Tourism should begin to recover from Covid but electronics exports are at best likely to be flat due to overall global demand.
Thailand is also highly oil import dependent but this should be more than offset by rising prices for its agricultural exports. Export manufactures and domestic demand will be restrained by price rises and possibly supply chain disruptions but tourism is beginning to recover from the pandemic perhaps led by visitors from Saudi Arabia and other oil exporters – though once-thriving Russian business looks dead for now. Thailand, which had expected more than a million Russian tourists annually in its efforts to recover from the coronavirus, has seen arrivals plummet almost to zero. The government has officially adopted a neutral position in the war.
Vietnam is now partly dependent on imported oil and gas and higher prices for these are unlikely to be offset by higher prices for its own major commodity exports, rice, coffee, and seafood. However, any weakness in overseas demand for manufactures should be offset by the gradual shift of investment in Vietnam from China.
Singapore could suffer from any contraction in international financial business caused by freezing of Russian and other assets – though it is also benefitting from an exodus from Hong Kong caused by Covid and political issues. Tourism should also revive.
Looking further ahead, however, the combination of Covid supply disruptions and now a war of unknown length which has created a new “Iron Curtain” across Europe, are sure to see a decline in reliance on offshore production and hence on foreign investment in countries which do not offer significant domestic demand growth. Here, demographics enters the picture and may especially hurt Thailand whose years of low fertility rate recently caused the government to talk of special measures to encourage childbearing.
On the political front, Singapore has been the boldest in criticizing the invasion, conscious of the need for small countries to be protected from bigger neighbors. Philippines and Indonesia have criticized the invasion albeit in muted terms. Malaysia’s position was, as usual, a vacant stare. Vietnam has kept silent, on the one hand, dependent on Russia for much of its military needs and also remembering Russian support during the Vietnam war against the Americans. On the other, it is clearly nervous about the principle of trying to regain a lost empire and sees parallels with China’s invasion of Vietnam in 1979 when the Vietnamese fought the vastly bigger Chinese military to a standstill.
ASEAN made a typically empty statement and the military government in Myanmar was the only one in the region to express support for Russia. That said a lot about both of them.