Economic growth at 7.8%, oil price rise a dampener: S&P Global Ratings

S&P believes that heightened market risk could also pull capital out of Asia’s emerging markets, hitting currencies, and raising funding costs.

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Indian Economy | S&P | world economy

Rising oil prices may dampen economic growth and cause a sizeable current account deficit (CAD) in large energy-importing countries like India, S&P Global Ratings said on Wednesday.

The ratings agency retained India’s economic growth at 7.8 per cent for FY23. It said that high inflation, weaker demand and increased uncertainty arising from the Russia-Ukraine conflict may slow the economic and fiscal recoveries much more than currently expected for many countries.

S&P revised its forecast for average Brent crude prices for 2022 to $85 per barrel from its prior assumption of $75. Crude oil prices have been on a boil with Brent crude touching $131.31 on Wednesday.

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

“This would hit current account balances and real domestic consumption and investment,” it added.

S&P believes that heightened market risk could also pull capital out of Asia’s emerging markets, hitting currencies, and raising funding costs.

“A widening of the conflict or further sanctions could push investors to haven positions, involving capital outflow from emerging markets, hitting assets and currencies,” it cautioned.

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

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

S&P is now forecasting that the US Federal Reserve will start normalising monetary policy faster than expected.

“This reflects higher and more persistent inflation than previously forecast, with a larger demand-driven 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 has ended. We expect an announcement on the strategy around reductions in the size of the balance sheet later this year,” it added.

The rating agency said external demand for the Asia-Pacific region would also weaken as a result of the ongoing crisis.

“We expect this will be most apparent in demand from Eastern Europe, the Middle East, and Africa, where the economic effects of the Russia-Ukraine conflict are likely to be the largest,” it added.

Economic growth at 7.8%, oil price rise a dampener: S&P Global Ratings

India Ratings and Research on Wednesday said rising crude oil prices could lead to India’s CAD touching 2.8 per cent of GDP — a 13 quarter high.

“Although the Omicron wave has subsided, the geopolitical risks to global recovery have increased due to the conflict. The direct effects of this conflict have pushed commodity prices and freight and transportation costs higher. In addition, the rupee, which averaged 75 against the dollar in February 2022, is expected to average around 76 in March 2022. This may result in a depreciation of 0.29 per cent in the March 2022 quarter over the December 2021 quarter,” it added.

India Ratings believes that despite the adverse effects of the conflict, merchandise imports are likely to recover further.

This is due to the normalising domestic economy, higher commodity prices and depreciation of rupee pushing the merchandise imports bill to over $166 billion in Q4 of FY22.

“The FY22 merchandise import bill is estimated to be at an all-time high of over $606 billion. However, merchandise exports may be constrained to $101.3 billion in Q4 of FY22, taking the merchandise exports to $406 billion in FY22. As a result, merchandise trade deficit is likely to come at $200 billion in FY22. All in all, CAD is expected at over $25 billion in Q4 of FY22,” it said.

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