The Palestinian-Israeli conflict has pushed the global economy into new instability, and the accompanying high oil prices and soaring US dollars are particularly detrimental to the development of emerging markets.
Economists worry that if the confrontation between Israel and Hamas escalates into a large-scale conflict in the Middle East, the oil supply system will be severely impacted, and the rise in the yield of the US dollar and the US long-term treasury bond bonds will exacerbate the risk of countries with high current account deficits.
Lavanya Venkateswaran, a senior economist at Overseas Chinese Bank, pointed out that if oil prices rise for a long time, India, Thailand, the Philippines, and Indonesia are more susceptible to the deterioration of trade terms. Double deficit countries, i.e. economies with both current account and fiscal deficits, are more susceptible to capital outflows.
To make matters worse, a rise in oil prices will reignite inflationary forces and drive up US bond yields. Alicia Garcia Herrero of Natixis SA, a French investment bank, warns that this poses another obstacle for countries with high budget deficits as they may find it difficult to raise funds in the global market.
Emerging market turbulence
Garcia Herrero stated that Sri Lanka and Pakistan face the greatest risks because their external debt is very dangerous. Secondly, India and Indonesia are also not optimistic, as they often run deficits in their current accounts and rely heavily on external financing.
The recent trend of the global bond market also reflects this risk. At present, the yield premium of Indian or Indonesian bonds relative to US bonds has reached its lowest level since the 2008 global financial crisis, indicating that investors are fleeing the bond markets of emerging economies.
HSBC strategists say they are more bullish on the Chinese yuan and Korean won among low yielding Asian currencies. China's fiscal policy adjustments and high attention to the real estate market, as well as the continued foreign exchange selling by the South Korean central bank and the possibility of the country being included in the global bond index next year, have supported the currencies of these two countries.
Apart from China and South Korea, other low yield currencies not only lack factors to support their currency value, but also have their own problems. HSBC strategists added that the Thai baht is affected by deteriorating financial indicators, while the valuation of the Singapore dollar is too high
However, Bum Ki Son, regional economist at Barclays Bank in Singapore, believes that Malaysia will benefit from the rise in oil prices. The increase in export tariffs, oil income tax, and dividends from state-owned oil companies will increase the country's fiscal revenue.
Others see some positive factors in India. Garcia Herrero stated that India's Purchasing Managers' Index (PMI) is the best performing in Asia, and strong macro data makes India attractive despite facing resistance.