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Threat Of Inflation A Worry For Asean Nations
Malaysia Perspective | 20 April 2011

By Predeeben Kannan

For most countries in South East Asia, the memory of hikes in food prices triggered by the rise in crude oil prices to US$147 per barrel in July 2008 still remains fresh in the minds of the general public and policy makers alike. The scenario caused a contagion effect that prompted several nations in the region to take some drastic actions to stabilise their economies.

In Malaysia, gasoline prices at the pump rose overnight by some 40 percent to RM2.70 per litre on June 5, 2008 from RM1.92 per litre the day before. In Indonesia, authorities were continuously increasing prices at the gas pumps, something they have been doing regularly since 2005. Philippines, in which is the largest consumer of rice in the world has seen its government interfering in the importation and distribution chains to ensure that food shortages to not take place.

It took several economic stimuli and assistance from the governments of these countries to get their economies back on track. However, recent movement of crude oil prices internationally seem to indicate a possible reoccurrence of the oil price hikes, which in turn might trigger another food crisis in the region.

Key Reasons To Worry
For the first time since the 2008 crisis, price pressures are occurring in the developed world. Stronger economic growth coupled with political upheaval in the Middle East has pushed NYMEX crude oil prices above US$110 per barrel.

To prevent inflationary pressure, the European Central Bank (ECB) has raised its interest rates for the first time in three years. The ECB raised its key rate by 25 basis points to 1.25 percent to counter rising price pressures in the 17-country Eurozone.

Another indicator of impending global economic weakness is the rise of Gold prices to a new record high in April. This was accompanied by higher Silver prices. Coupled with a weaker US Dollar, it has made the situation of rising crude oil prices more worrisome.

Analysts believe the weak US Dollar and fears of the Eurozone debt crisis in Portugal, prompted the rise in gold prices. Gold bullion broke above the key resistance on technical charts and could target above US$1,500 an ounce.

The US Dollar fell to a 15-month low against the Euro over fears of a cut in US government funding announced by President Barack Obama. Most analysts expected the US Dollar to continue remaining weak throughout the year.

In a recent meeting among finance ministers of the Association of South East Asian Nations (ASEAN), several key leaders expressed concerns that the rising food and oil prices could trigger a 2008 style, inflation. The Indonesians are especially worried as the Rupiah rose to a 4-year high against the US Dollar in April while its inflation rate is around 6.5 percent.

The country’s President, Susilo Bambang Yudhoyono believes that the current global scenario could be a threat to Indonesia and countries around the region;

Trade and liquidity imbalances combined with inflation may threaten the global economic recovery, food and energy security and the achievement of millennium development goals (in the region)” he said.

Capital inflow into the region has increased tremendously in the last few weeks, leading to concerns that much of it could be speculative “hot money”. Economists in the region still remember the Asian Financial Crisis in 1998, brought about largely by the rapid exit of “hot money”, leading to massive falls in the regional stock and currency markets.

As a first stage measure to protect the growth and development of the various ASEAN economies, the group agreed on the setting up of the ASEAN Infrastructure Fund (AIF) worth US$485 million. The fund will be located in Malaysia. The key aim of the fund is to complement infrastructure development among member countries to ensure a balance in the ASEAN economy as well as to expand the group’s market size.

The ministers of ASEAN have also agreed to implement a US$700 million credit guarantee and investment facility in the next month as previously promised under a broad range of initiatives to bring the region’s economies closer together.

Looking Ahead With Cautious Optimism
The Organisation for Economic Cooperation and Development (OECD) announced that the ASEAN-6 regional GDP growth will average 6% annually from 2011 to 2015. This is equivalent to the pre-crises levels of the 2003 to 2007 period.

Indonesian Trade Minister Mari Elka Pangestu had more reassuring news for the ASEAN region;

“Two-thirds of the world’s economic growth is being supported by the economies of ASEAN member countries and this only shows the importance of ASEAN and East Asia in the global context.”

Over the past few months, several ASEAN nations have announced expected growth rates of between 4 to 7 percent for 2011, despite all the external threats faced by the group’s economies. Barring severe economic malaise as such experienced in 1998 or 2008, nations in the region are expected to glide through the current economic hurdle, unscathed.

However, as countries in ASEAN are largely dependent on exports to stimulate their economy and maintain competitiveness, any disruption to the global trading system would put a damper to growth and development within the region. Let’s hope for ASEAN’s sake, the economic ball remains in its court, for the foreseeable future.

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