00:00Great to be here. Good morning.
00:01Do you still hold a view, I mean, given what we're seeing in the markets right now, a reassessment of
00:05risk,
00:06and perhaps this war could be longer than you think?
00:09I think that's the key, right? Duration is the key over here.
00:11I think there's enough buffers that the global economy has to get through a week or two weeks.
00:15If this were to go on for weeks and months, then of course it represents a big macro shock.
00:20I think the key constraint in the near term, or the binding constraint,
00:23is going to be storage facilities in each of these oil producers, right?
00:27It's because once you hit the storage constraint, that production begins to shut down.
00:32And then once production shuts down, then you have a longer impact on higher global oil prices.
00:37We shouldn't forget that before the conflict started, the crude market was in a structural excess supply.
00:44Our estimate was crude would go to $60 or below this year.
00:47In an environment, where growth is quite strong.
00:49So we're seeing a large geopolitical risk premium, right?
00:53And so if this were to abate in a few weeks even, we expect by the second half of the
00:57year,
00:57crude goes back, the gravitational force is again back to $60 or $65.
01:01So the duration, the key here is how long will this continue in the medium term?
01:05And more importantly, in the near term, when the storage becomes a binding constraint in different countries.
01:10For some countries, it's four days. For some countries, it's 15 days.
01:13This could become nonlinear quite quickly.
01:15So you talk about duration. It could be weeks, could be months.
01:19Trump has already said four to five weeks.
01:21I mean, at what stage, at what duration would you be worried?
01:25I'd worry if we go beyond two weeks purely from an oil price market.
01:30So this is going to represent a shock to the region for sure, you know, in terms of remittances, in
01:36terms of, you know, tourism.
01:38The question is, does this proliferate to the broader economy?
01:42And the transmission mechanism from the Middle East to the global economy is oil prices.
01:46So 15 days from now, if there is no letup in things and you start getting very sharp increases in
01:54production cuts,
01:55then the lingering effect on oil prices, even beyond when this conflict ends, will be longer.
02:02And I think, therefore, the next two or three weeks becomes really crucial.
02:05You talk about how it depends on countries and the buffers that they have.
02:10What would it take for this to impact the world for it to be to be leading to a global
02:15inflation issue?
02:17Yeah, I think that will take, you know, crude going up into triple digits.
02:21And it's not just going up on impact. Right. It's staying there.
02:24I think the key is it's not so much the price. It's the price times how long it stays there.
02:29If it stays there for a week, the world can get through this.
02:31If it stays there for several months, then there are different impacts.
02:34First is you get a purchasing power squeeze on households because inflation will go up.
02:39And then central banks would be much less inclined to look through the shock because it won't be a matter
02:43of a few days or a few weeks.
02:45They'll worry that this will affect inflation expectations.
02:48So I think, you know, once you get past a few weeks of oil remains elevated for several weeks or
02:53months,
02:54then we get into this having an impact on global growth.
02:57The good thing about Asia, Sinderweber, sitting is the starting points are quite favorable on two fronts.
03:03Inflation in this region has been very benign. Right.
03:06Almost too benign in some countries where core inflation is too low, reflecting slack in the region.
03:12Part of this is because Chinese disinflationary forces in Asia.
03:15Now, that's a good thing because when inflation is much below target, central banks have a little bit of room
03:19to work with before crude pushes inflation up.
03:23A. B. Even current accounts and external imbalances, which is the other area this will impact.
03:27Right. If you're a current account surplus, current account deficit country, are in much better shape.
03:31You look at the North Asian economies, Korea's and Taiwan's, they've had surging tech exports.
03:36Right. So the current account surplus is very large.
03:39If it means higher net crude imports, means higher LNG imports, you've got buffers to work with.
03:45But India and Indonesia, both current account deficit economies, India's current account deficit is less than 1% of GDP.
03:51So is Indonesia. So the starting points, at least for Asia, both from external imbalances and inflation, is quite favorable.
03:58But inflation is benign precisely because oil has been pretty cheap.
04:02And you talk about the buffer. How much buffer?
04:04If oil remains sustained at 90 bucks a barrel, which is possible?
04:08Of course, that's going to matter. But I think inflation has been benign beyond just oil pricing.
04:13There are at least three factors here. One is commodities have been contained.
04:17The second is on goods prices, fine goods prices, China has imposed a large disinflationary impact on the rest of
04:23the region.
04:24And the fact is, many of these Asian economies have not caught up to their pre-pandemic path,
04:29which means there's slack. And that's meant inflation has been low.
04:33But you're right. If oil is at 90 for several weeks and months, of course, we have a problem.
04:37But we've got a long way to go before we get there.
04:40And China, how far can China provide that buffer?
04:42We know that China has enough capacity of oil to last, I think, weeks.
04:47I'm not sure of the exact number. Could China provide the buffer for Asia?
04:52If it's stable in China, it could be relatively stable for the rest of Asia.
04:55Exactly. There are buffers that different countries in Asia have.
04:58You know, there's some thought that will Asia be more reliant on Russian crude?
05:03Will that be a possibility going forward?
05:05What if physical crude can't move from the straight and foremost towards Asia?
05:08So there are degrees.
05:09I think the question is, for a few weeks, you can juggle around the pieces.
05:13If this goes beyond a month, then we're talking about, you know, meaningful production cuts and countries getting impacted.
05:20So I think the next three or four weeks becomes really important.
05:22Is India most at risk?
05:24Well, India is a very large oil importer.
05:28And so, yes, mechanically, the impact on the current account deficit is large.
05:32But again, starting points matter.
05:35India's current account deficit, a sustainable level is considered about two and a half percent of GDP.
05:40We're going to end this year at below one percent of GDP, number one.
05:44Number two, India's inflation is at two percent.
05:46And most of all, there's a huge stockpile of foreign exchange reserves.
05:50So I think the broader issue is after 2013, emerging markets have been working systematically to improve macro frameworks precisely
05:58because we're in this shock-prone environment where, you know, one shock hasn't abated and another one's upon us.
06:05The shock that could come next is a very strong dollar.
06:08We're already seeing some unraveling of the Asian currencies.
06:11We've had central banks having to step in, intervene and prop up their own currencies.
06:15Indonesia, case in point.
06:17How concerned should we be?
06:18Again, the region has reserves.
06:21But the worry, as you said, is if this goes on for longer and you get correlated shocks.
06:25So what are the correlations here?
06:26Crude goes up.
06:28There's uncertainty, risk of inflation.
06:30Gold goes up because many countries import gold as well.
06:33And both are up?
06:34Both are up.
06:35And both affect the current accounts.
06:36If you're a current account deficit economy like India, it affects your current account.
06:40And then you're relying on capital flows to finance the current account.
06:43But if the dollar is stronger, then those capital flows are also questionable.
06:48So this is where buffers matter.
06:50And this is where good macro frameworks matter.
06:52So I think the first reaction is panic.
06:55But then if investors sit back and think and say, well, these countries have got low inflation, large reserves, fiscal
07:01frameworks are fine.
07:02I think the second order effect is to sift through this across countries.
07:06How is it looking for a country like Japan, which is also an oil importer?
07:11Yes.
07:11And we're waiting for the Senate Bank to raise rates.
07:14Yeah.
07:14I think the developed markets is where the risk of a sustained oil shock paradoxically is higher because they're entering
07:21this with much more sticky inflation.
07:24Japan's one, where there's pressure both on the currency and on bond yields.
07:28The U.S. is one.
07:29We forget the six consecutive years that the Fed has missed its 2 percent inflation target.
07:33Now, it's a short-term oil shock.
07:35But it is an oil producer.
07:36It is.
07:37But, I mean, if there are higher oil prices, so, yes, there will be a distribution in the economy.
07:41Producers will benefit.
07:42But consumers will see higher prices.
07:45And that's what matters for the CPI basket.
07:47And that's what the Fed will have to react to.
07:49So, the question is, if it's a short shock, a few weeks, the Fed will say it's one we have
07:53to look through.
07:54But once this is long enough to begin to affect inflation expectations, that's when all central banks get quiet and
08:01begin to preempt.
08:02But I would argue, again, that developed markets are almost in a more tricky situation because coming into the shock,
08:08their inflation levels have been higher and more sticky.
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