Economist says “great risk” of unrest in ASEAN if food inflation rises
A supermarket in Indonesia on May 1, 2022. Compared to other countries, food consumption accounts for a large proportion of what people spend in countries such as Indonesia, the Philippines and Vietnam, said economist Muhammad Faiz Nagotha.
Adriana Addy | Norfoto | Getty Images
An ASEAN economist at Bank of America Securities told CNBC that Southeast Asia would face a “significant risk” of social unrest if there were “significant spikes” in food prices.
This is because, compared to other countries, food consumption accounts for a large proportion of what people spend in countries such as the Philippines, Indonesia and Vietnam, Muhammad Faiz Nagotha said on Friday.
In 2021, Filipino households spent nearly 40% of their total spending on food and non-alcoholic beverages, according to the Philippine Statistics Authority.
By comparison, American households spent 8.6% of their disposable income on food, the Economic Research Service reported.
“Having said that, food inflation in ASEAN in particular has been a little less volatile (and) more contained than in the past because we depend so much on intra-regional trade and there is a lot of government support in place to keep food inflation in place,” Nagotha told CNN. C “Street Signs in Asia”.
However, he warned that prices will eventually rise, although governments hope the increase will be gradual.
“Usually it’s the big shock jump that causes so much unhappiness on the street,” he said.
Nagotha said inflation in Southeast Asia is on the rise but still low from a historical perspective, although he noted that the situation will change over the coming months and quarters.
Regional inflation rose from 3% in February to 3.5% in March, according to information service firm FocusEconomics.
He said that as economies reopen and people consume more services, demand will contribute to higher inflation. However, this will add to the cost pressures companies are under, and they will look to pass on some of those costs to consumers, he added.
That, he said, combined with global energy and food inflation, would push headline inflation in Southeast Asia even higher.
However, the long-term outlook for inflation remains uncertain because it is still not known what oil and other commodity prices will stabilize at, Nagotha added.
“At our baseline, we assume it remains high,” he said, which would keep global inflation high. However, he added, the recession is not in the baseline forecast.
“For ASEAN, this means that inflation may come off the peak, but it will still be high compared to the historical context, and it should remain high relative to where central banks want to see it,” he said.
central bank reaction
With the exception of the Monetary Authority of Singapore, most central banks in Southeast Asia have not taken any action, Nagotha said.
He added that given how far Southeast Asia is in its recovery from the Covid virus, central banks there must be prepared to look beyond supporting growth and looking at inflation.
“It’s about stabilizing inflation expectations and sending a signal that the policy rates we have in ASEAN are no longer guaranteed given where we are in the global inflation cycle,” he said.
However, Southeast Asian central banks are slowly moving toward a tightening bias, he said, starting with a possible rate hike from the Malaysian central bank next week.
“And as for other central banks in ASEAN, we are seeing rate hikes from the second half of the year,” said Nagotha.
“One of the exceptions is Thailand because they have been significantly behind in terms of recovery growth – so we think they can afford to stay on hold a little bit longer,” he added.
However, Euben Paracuelles of Nomura, a financial services firm, said the Philippine central bank is unlikely to raise interest rates this month, although it may do so in June if it sees signs of higher core inflation.
“There is no real reason to raise interest rates because higher interest rates have not resolved higher fuel prices or higher food prices,” Barakoulis told CNBC.
He added, “Inflation is high on the main basis, but if you consume energy and food, then the (inflation) core is much lower.”