Oil, commodity prices to soar due to Russia invasion, driving up inflationary pressures

OIL prices are expected to soar with Russia's invasion of Ukraine, driving up inflationary pressures and potentially hurting Singapore's gross domestic product (GDP) growth, observers said on Thursday (Feb 24).

The Republic should also brace for higher commodity prices in the short term, said OCBC chief economist Selena Ling, as the fresh sanctions announced by the European Union may not hurt Russia sufficiently to make it reverse course.

Most economists said it is still too early to project how much Singapore's GDP could be affected by the conflict, as the situation remains volatile.

Still, should the conflict escalate into a full-blown war, Maybank Kim Eng economist Chua Hak Bin said a recession in Europe and an oil price shock of US$150 could deliver a severe blow to the global economy and bring Singapore's growth to below 1 per cent this year.

"Inflation is already elevated and at a decade high even before this conflict. A big and persistent oil price shock could drive headline inflation over 5 per cent and core inflation well over 3 per cent by the second or third quarter," Chua added.

As the conflict stands now, though, DBS senior economist Irvin Seah said the impact on growth is limited as Russia accounts for just 0.1 per cent of Singapore's total exports, and 0.8 per cent of total imports.

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But should an all-out war take place, there will be an impact on global financial markets, which will in turn take a toll on the Singapore economy and drive inflation up, he said.

Agreeing, Ling said Singapore's economy is not completely immune to any contagion effects from a full-blown war, even though its exposure to Russia as a non-oil domestic exports market is very small.

"The Singdollar, being one of the most liquid currencies traded, is already feeling the risk-off volatility - Singapore dollar nominal effective exchange rate (S$NEER) is down to +1.2 per cent compared to +2 per cent not so long ago," she said.

On that note, economists expect that the Monetary Authority of Singapore (MAS) will stay on course and tighten monetary policy further and more aggressively during the April meeting, in a bid to guard against inflation.

"MAS may have to tighten more aggressively in the face of higher inflation pressures and allow the Singdollar to strengthen more quickly and by a larger magnitude," said Chua.

Separately, Simon Garing, chief executive officer of the manager for Cromwell European Real Estate Investment Trust, said he does not foresee the conflict having any near-term impact on its business.

Only about 10 per cent and 2 per cent of the Singapore-based Reit's portfolio are in Poland and Slovakia respectively, which share borders with Ukraine.

Additionally, the majority of Cromwell E-Reit's tenant-customers in these 2 countries are multinational companies such as European banks, global pharmaceutical and tech groups, said Garing.

"All in all, with such limited exposure, we do not foresee any near-term impact to our business," he said.

Meanwhile, in response to queries from The Business Times, Olam, which has food processing operations in Ukraine and Russia, said its "overriding priority" is the safety of its people.

"We continue to assess the impact on our operations, and keep our customers updated," the Singapore-headquartered company added.

In its reply, Trafigura said it monitors geopolitical issues and complies in full with all applicable regulations and sanctions in the jurisdictions in which it operates.