Asia faces ‘tough decisions’ on inflation as oil prices rise, ADB says

Higher oil prices will challenge regional governments to make “tough decisions” on inflation, said Albert Park, chief economist at the Asian Development Bank.

Most Asian economies are importers of oil, like Indonesia and those in central Asia, said Park. As a result, the latest sudden OPEC+ oil production cut could lead to a spike in prices, the economist added.

“With the OPEC oil price increase and the expected rising demand coming from China, we could see oil prices go beyond our forecast of $88,” he told CNBC “Squawk Box Asia” on Tuesday.

“That would put pressure on the region because higher oil, obviously, increase costs of production. They increase inflationary pressures as well.”

This puts “a lot of pressure” on regional governments to make “some tough decisions about trying to control inflation and support economic recovery,” the economist added. 

On Sunday, several OPEC+ members said they will voluntarily cut a further combined 1.16 million barrels per day of production, in a move independent from the broader bloc’s output strategy.

It comes nearly six months after OPEC and its allies decided to cut output by two million barrels per day.

Park said inflation within the region is “moderating.” But core inflation rates, which strips out volatile food and energy prices, “are still higher than normal” among many Asian economies, he added.

“Monetary authorities need to be vigilant, and we still may not have seen the end of high rate increases in the region,” said Park. “But certainly they’ve slowed down considerably.”

Inflation is expected to moderate this year and next, gradually moving closer to pre-pandemic levels, ADB said in its report on regional outlook released on Tuesday.  Headline inflation is forecast to decelerate to 4.2% in 2023 and 3.3% in 2024 — compared to 4.4% last year.

“While higher interest rates and still-elevated commodity prices are expected to shape the region’s inflation outlook, headline inflation should remain the same this year in East Asia and decline in other sub regions,” the report said.

The outlook for Asian economies has improved since China’s reopened and steered away from strict Covid restrictions last year, said ADB. 

Growth in developing Asia is expected at 4.8% for 2023 and next year, with South Asia predicted to grow faster than other regions.

“Before China left zero Covid policy behind, our forecast for growth in China this year was 4.3%. But we’ve upgraded that in this announcement to 5%,” said Park.

“If the Chinese consumer comes back that’s going to be very good for the region. China, obviously, is a source of final demand for many goods produced in the region,” noted the economist.  

More importantly, China’s economy has become increasingly “embedded in global value chains in the region,” he added. “The lack of lockdown risk in China really frees up supply chains, and that could be a boon” for the region.

But ADB warned there are “immediate and emerging challenges” that could still hold back the region’s recovery.

“The recent banking turmoil in Europe and the United States is an indication that financial stability risks have heightened. Policy makers should stay vigilant in the post-pandemic environment of higher interest rates and debt,” the bank said in its report.