ASEAN inflation: Where are the risks?

Vietnam's CPI in January 2023 rose by 0.52% against December 2022 and increased by 4.89% over the same period last year, according to the General Statistics Office (GSO).

>> Global inflation could ease in 2023

Thailand was the first one to see its headline inflation peak, thanks to easing global oil prices. Despite a slight uptick in December, which was mostly due to base effects, the trend should remain for 2023. However, the inflation path back to target will likely be very gradual and sticky for two reasons. For one, the return of tourists in Thailand should put considerable demand-side pressure on prices. Second is the spirit of fiscal prudence. Price pressures should resurface once authorities taper their generous subsidies. For instance, power tariffs for both households and businesses were scheduled to rise to THB5.33 per unit from THB4.72 from January to April 2023.

A similar narrative is occurring in Malaysia, with generous subsidies set to be more targeted in 2023, albeit they are likely to remain sizeable. PM Anwar Ibrahim has signalled his intentions to reduce power subsidies for large businesses and divert the fiscal spending towards the needy, with medium and high voltage electricity users to be charged a higher surcharge of MYR0.2 per kilowatt hour from 1 January. However, the key to watch is core inflation, which has been supported by the robust labour market, and HSBC expects it to remain sticky in 2023.

In Indonesia, when the government increased the price of domestic fuel by c30%, there was a fear that inflation would shoot up. Following the fuel price hike, administered price inflation has been in the double digits. Fortunately, rising energy inflation was more than offset by falling food prices on the back of a good harvest, thereby keeping a lid on headline inflation. Inflation has peaked with headline CPI  PUBLIC  inflation showing signs of moderation. However, worries over core inflation persist as it is closer to the upper bound of the 2-4% inflation target of Bank Indonesia (BI). HSBC expects core inflation to rise from 3.3% in November to an average of 3.7% in 1H2023, as second-round effects of the fuel price rise kick in. Thereafter, this bank expects it to soften, though remain higher than the 3% target in 2H23.

Singapore is another frontrunner with headline inflation past the peak in September. That said, we expect prices to stay elevated, especially with the implementation of the first phase of its goods and services tax (GST) rate hike, from 7% to 8%, from 1 January. In particular, how it will interact with an already-high core, supported by a tight labour market, is key. Meanwhile, private residential housing indicators still point to a buoyant market with ample demand, with the Monetary Authority of Singapore (MAS) noting that vacancy rates are below historical averages.

“Contrary to most of ASEAN, two countries have not seen their inflation peak. In Vietnam, although headline inflation averaged 3.2% in 2020, well below the State Bank of Vietnam’s (SBV) inflation target of 4%, recent inflation prints have consistently overshot 4%, reflecting rising inflation momentum. Despite some reprieve from stabilising oil prices, core and food inflation continue to creep up in Vietnam”, said HSBC.

The Philippines is especially sensitive to food inflation, pushing its December inflation to the highest rate in ASEAN. A risk noted even before the election was that the Marcos administration would likely shift policy, which it did, by imposing trade restrictions on some key food key items to help strike a balance between protecting the agriculture sector and consumers. Restricting imports – either through tariffs or non-tariff means – can help raise the incomes of those working in agriculture, but has an immediate trade-off as it leads to higher retail prices for consumers. The good news is HSBC

 believe inflation peaked in December. Upside risks, however, dominate the outlook as the administration’s leanings toward restricting trade for some food items will likely keep food and overall CPI volatile.

>> Will inflation pressure continue to cool down?

However, HSBC believes the key upside risk is persistent core inflation, given a strong labour market rebound. In fact, the unemployment rate in some markets is higher than that in 2019, given only a small rebound in regional tourism. This suggests further room for the recovery, stoking demand-side price pressures.

Despite easing imported inflation, HSBC cannot rule out further external shocks. Electricity tariffs in Vietnam are facing upward pressure as the price of imported coal remains elevated. There is also China’s rebound and its implications on global energy demand to consider. For instance, Thailand’s inflation prospects are largely dependent on global energy prices.

In addition, any change in domestic fiscal policy warrants closely watching. The Philippines will start 2023 with a reduction in personal income taxes, thus creating demand-side price pressures. The tax cut may negate some of the rate hikes already done by the Bangko Sentral ng Pilipinas (BSP), making core inflation sticker-than-expected. Vietnam will see environment tax cuts persisting through 2023, while more clarity will come soon in Malaysia after the new Budget 2023 is unveiled on 24 February.