Inflation, supply chain disruption major risks for emerging Asia: Moody's

Inflation and supply chain disruptions are the biggest risks over the next 12-18 months in emerging Asia, according to an audience poll at the Emerging Market Summit Asia 2022 organised by Moody's Investors Service on September 6.

These two risks were followed by the potential impact of rising interest rates and slower economic growth, Moody's said in a statement.

"Given the supply chain disruptions, multinational corporations (MNCs) have indicated a rising intention to relocate more manufacturing away from China. Still, we agree with panelists that China will remain embedded in many supply chains due to its comparative advantages.

Nevertheless, Southeast Asian economies will increasingly benefit from supply chain diversification as more MNCs adopt the 'China +1' strategy," said Jacintha Poh, a Moody's Senior Vice President.

At the same time, supply disruptions due to the Russia-Ukraine military conflict have boosted prices of thermal coal, oil and gas to record levels.

As a result, rated commodity producers in Asia reported strong earnings and cash flow, which they used for debt reduction, investments or shareholder returns. These bumper earnings have supported producers amid regulatory risks and rising environmental, social and governance concerns, Moody's said.

Although commodity prices have retreated from record levels, Moody's expects supply additions to be limited, while demand will remain strong during winter.

Over the longer term, the weakening global growth outlook would reduce demand for most commodities.

Meanwhile, tighter credit conditions will reduce financing activity and diversity in the financing of Asian emerging market infrastructure over the next 12-18 months.

Emerging markets will bear the brunt of the impact compared with other regions.

As a result, multilateral development banks and governments will play an increasingly important role in bridging the funding gap for infrastructure projects in Emerging Asia to offset credit difficulties and improve investor sentiment, said Moody's.