India and Indonesia Face Significant Consequences from Geopolitical Shocks

India and Indonesia Face Significant Consequences from Geopolitical Shocks

India and Indonesia Face Significant Consequences from Geopolitical Shocks

Asia’s emerging markets, particularly India and Indonesia, are facing economic challenges due to a combination of factors, including high oil prices, a strengthening dollar, and geopolitical instability. These issues are causing concern among economists and policymakers, as they impact the region’s growth and stability.

Geopolitical Concerns in the Middle East

The ongoing Israel-Hamas conflict has added to the geopolitical tensions in the region, exacerbating concerns about oil supply and its potential impact on economic growth. There are fears that the conflict may escalate to involve Iran, which could further disrupt oil markets. Higher oil prices, combined with a surging US dollar, pose risks to economies with high current-account deficits.

Vulnerable Economies in Asia

Economists are particularly concerned about the economic vulnerability of countries like India, Thailand, the Philippines, and Indonesia, which are at risk of experiencing deteriorating terms of trade due to higher oil prices. These “twin deficit” economies, with both current account and fiscal deficits, are also susceptible to capital outflows.

Debt Position and Risks

Sri Lanka and Pakistan, with high external debt positions, are considered the most at risk. Indonesia and India, which often run current-account deficits, require external financing, making them vulnerable to external shocks. Rising US Treasury yields, driven by concerns of inflationary pressures from higher oil prices, can make it challenging for these countries to raise funds in global markets.

Attractiveness of Asian Bonds

Asian bonds have become less attractive for investors, with premiums for owning bonds from countries like India and Indonesia against US debt at their lowest levels since the 2008-09 global financial crisis. This reflects the apprehensions about the economic challenges these countries may face.

Currencies and Preferences

HSBC strategists prefer the Chinese renminbi and the Korean won among low-yielding Asian currencies. They believe that these currencies benefit from supportive factors like China’s fiscal policies, South Korea’s foreign exchange management, and potential inclusion in global bond indexes. Among higher-yielding currencies, they have a slight preference for the Philippine peso and the Indian rupee over the Indonesian rupiah.

Malaysia’s Advantage

Malaysia, as an oil-exporting country, stands to benefit from higher oil prices in terms of growth and fiscal revenue. Export duties, petroleum income taxes, and dividends from the state-owned Petronas are expected to contribute to the country’s fiscal position. In contrast, Indonesia’s fiscal position is anticipated to deteriorate.

Despite these headwinds, India’s strong macroeconomic data and positive economic indicators continue to make the country’s assets attractive to investors.