Inflation puts social stability at risk: Standard & Poor's

Inflation may put macroeconomic and social stability at risk in a number of Asia-Pacific countries, including Bangladesh, due to the challenges of strong capital inflows and rising inflationary pressures, said Standard & Poor's Ratings Services in a report recently.
“In our opinion, inflation has become -- or continues to be -- an important risk to macroeconomic and social stability in a number of countries," said Standard & Poor's credit analyst Elena Okorotchenko.
The report also put Vietnam, Sri Lanka, India, Indonesia, Mongolia, Cambodia, Cook Islands, Fiji and Pakistan on the list.
According to the report, Asia-Pacific Sovereigns In 2011: Generally Stable Credit Quality; Inflation, Capital Flows Make Policy Environment Tricky, the challenges of strong capital inflows and rising inflationary pressures bring in important credit risks. “Domestic politics and increasing geopolitical risks further complicate policy decisions.”
In Asia, there are countries with ongoing political or social tensions and risks independent of recent events in the Middle East. “We have factored these risks into current ratings on these sovereigns,” said Okorotchenko.
However, Asia continues to outperform other regions in terms of growth and sovereign credit trends. Despite generally stable credit quality, various factors have combined to make the policy environment tricky for sovereigns in the region, said the report.
"In our base-case scenario, strong growth will support credit quality in Asia-Pacific," said Okorotchenko. "Economic growth will enable the public sector of high-income economies to reduce fiscal deficits and resume fiscal consolidation and allow emerging market governments to speed up structural reforms."
But the downside risks to this scenario are growing beyond just a slower US economy or the eurozone debt woes. Food and energy price increases, the familiar bugbears, are providing a strong inflationary impetus across the board, and present low-income sovereigns in particular with difficult political and fiscal choices.
In addition to inflation, a number of sovereigns, such as Indonesia, Thailand, and Korea, could be facing problems with capital flows, either as a result of large inflows/outflows complicating exchange rate management or because of potential policy mistakes in trying to control such flows.
Recent developments in several Middle Eastern countries have raised questions about contagion effects. Such popular uprisings are highly unpredictable, although the risks appear to be more pronounced where high unemployment among the young, inflation, poverty or wide income gaps are combined with growing political disillusionment in an autocratic and often corrupt regime.
In a number of other countries, the risk of social unrest is present but mitigating factors are currently strong. These are China, Vietnam, Sri Lanka, Malaysia, and Cambodia, the report said.
“The risks in these countries are mitigated by some combination of strong growth, low unemployment, and a degree of popular support for the government,” Okorotchenko added.