Search

FACTBOX-Inflationary stresses confronting Asia

Reuters - Saturday, June 21

June 20 - The rising prices of food and imported fuel are pushing inflation in many parts of Asia to their highest in a decade, weakening trade and budget balances and complicating monetary policy.

Asia's currencies are weakening and asset markets are strained on worries that rising inflation will soon hurt growth, investment and corporate earnings, and destabilise governments.

Here are some details of Asia's inflation, and the policy and political implications.

CHINA

-----

Inflation - Annual consumer inflation in April fell to 7.7 percent higher from a near 12-year high of 8.5 percent in April and compared with a government target of 4.8 percent for 2008.

GDP - Growth remains strong, at a 10.6 percent annual pace in the first quarter.

Current account - 2007 surplus was $371.8 billion, or 11.3 percent of GDP.

POLICY RESPONSE -

Rates: No interest rate rise since December. The focus has been on draining liquidity by raising bank reserve requirements.

Subsidies: China unexpectedly raised retail gasoline and diesel prices by up to 18 pct and power prices by nearly 5 percent in June. Fearing that the move would stir popular resentment, Beijing pledged subsidies for lower income groups. The government has also encouraged a supply side response via increased subsidies to farmers, banning exports of some foods and tweaking import and export taxes. It has also imposed price curbs on everyday necessities and increased handouts to vulnerable groups such as pensioners and students.

FX: The yuan <CNY=CFXS> has been allowed to rise faster, but largely against the dollar, since the start of the year.

INDIA

-----

Inflation - Wholesale prices rose 11 percent in the week ended June 7 from a year earlier, a 13-year high. The central bank aims for inflation to be no higher than 5.5 percent at the end of the fiscal year in March 2009.

GDP - Growth is strong, recording annual pace of 8.8 percent in January-March quarter, but expected to slow gradually.

Current account - A deficit of $5.4 billion in the October-December quarter.

POLICY RESPONSE:

Rates: The central bank raised its lending rate on June 11 for the first time since March 2007, but has tightened policy by raising banks' reserve requirements three times so far in 2008.

Subsidies: Fuel prices were raised in June but remain far below international levels. Among measures to tackle food inflation, India imposed bans and taxes on rice exports and scrapped import duties on crude edible oils.

FX: The rupee has been falling since April on concerns over rising oil imports, portfolio outflows and inflation.

Political response: Widespread strikes and protests followed the fuel price rises. With general elections looming in 2009, the Congress Party-led government has asked state governments to cut sales taxes and excise duties.

INDONESIA

---------

Inflation - Inflation measured by CPI hit a 20-month high of 10.38 percent in May. The central bank expects inflation to hit 11.5-12.5 percent by the end of 2008.

GDP - The economy in the first quarter of 2008 was strong, expanding 6.28 percent from a year earlier.

Current account - surplus of $10.36 billion in 2007, down 4 percent from the previous year.

POLICY RESPONSE:

Rates: Bank Indonesia has raised rates twice, in May and June, after keeping them steady since December and stoking concerns they were behind the curve on fighting inflation.

Subsidies: The government raised fuel prices by nearly 30 percent in May, but local prices are still among the lowest in Asia. The Southeast Asian region's largest rice consumer has also limited rice exports.

FX: The central bank has been intervening to stem the depreciation of the rupiah <IDR=>, which is up around 1 percent this year against the dollar, out of concern currency weakness could stoke inflation.

Political response: Protests over the May fuel price rise have largely died down. Despite the ballooning cost of fuel subsidies, the government is unlikely to raise fuel prices again before the 2009 presidential and parliamentary elections.

MALAYSIA

--------

Inflation - May CPI growth hit a 22-month high of 3.8 percent. The central bank has said inflation would be 4.2 percent in 2008, up from 2 percent last year.

GDP - Growth of 7.1 percent in first quarter over a year earlier. The central bank estimates growth will slow to 5-6 percent this year.

Current account - Surplus of $30.45 billion in 2007. Malaysia is Asia's sole net exporter of oil, so analysts expect its trade surplus to remain healthy in 2008.

POLICY RESPONSE -

Rates: The central bank is in no rush to raise its overnight policy rate of 3.5 percent. It left rates on hold for the 17th straight meeting in May.

Subsidies: Malaysia raised the retail price of petrol by 41 percent and diesel by 60 percent in June. Fuel subsidies will be cut to 18 billion ringgit from 56 billion ringgit, the government estimates.

FX: The central bank said that there were no plans to use the ringgit <MYR=> as a policy tool although it also said that a stronger exchange rate will help contain imported inflation.

Political response: The fuel price hike has sparked some small street protests. Protes, a loose grouping of opposition parties and non-governmental bodies, has said it hopes to bring 100,000 people out on the streets on July 12 to demand that fuel prices be brought back to their earlier level. In a bid to soothe public anger, the government has announced modest cost-cutting measures, which include trimming entertaiment allowances for government ministers and delaying some public projects.

Recommend this article

Average (0 votes)
0 stars
Sign in to recommend this article »
Most Recommended Stories »

Related Articles: Business