Red Sea crisis likely to dent India’s growth forecast, says BMI a unit of Fitch Group

NEW YORK : Amid rising hostilities in the Red Sea due to Houthi attacks, Fitch Group said South Asian economies would be most affected. They will experience the largest relative increase in maritime trade distance, shipping time, and costs as the crucial trade route remains inaccessible.

It added that India’s economic forecast faces a significant risk in the event of a prolonged spell of disruptions.

“If Red Sea disruptions were to persist, the resulting downward revisions to our India and Bangladesh forecasts will probably be significant and would dent our 4.0 per cent growth forecast for Asia in 2024,” BMI, a unit of Fitch Group, said in its commentary.

All these matter because we expect India and Bangladesh, two of the most vulnerable economies to Red Sea shipping disruptions, to outperform in terms of gross domestic product growth this year, it said.

The Red Sea is a key maritime shipping route linked directly to the Suez Canal, which substantially reduces the maritime trade distance between Europe and Asia and carries a significant 12 per cent of the global trade.

The crisis has caused major movements in the container and ocean freight markets, sparking fears of inflation across the world.

Last week, India’s commerce department said attacks by Houthi rebels have resulted in a combined impact of higher freight costs, insurance premiums, and longer transit times. The impact can make imported goods significantly more expensive.

The Department of Financial Services, under the finance ministry, has been asked to monitor that exporters are given smooth credit to keep trade volatility in check.

According to the Drewry World Container Index, container prices have nearly tripled since the start of the maritime crisis to $3,777 for a 40-foot equivalent unit container as of January 18. The rates are 23 per cent higher than last week.

Freight rates between China and the US swelled by 35 per cent in the space of a week, with similar surges seen across maritime routes.

“As the six-day blockage in 2021 as well as the eight-year closure of the Suez Canal in 1967-1975 (due to the Six-Day War and the Yom Kippur War) show, disruptions to shipping through the Canal and the Red Sea can have a major impact on global trade. The blockage, for instance, held up an estimated $9 billion in trade for each of the six days it lasted,” Fitch said.

It added, the rerouting of shipping to avoid the Red Sea will reduce global trade and fuel price pressures by increasing shipping costs, thus weighing on economic activity.

Citing a 2009 research on the eight-year Suez Canal closure by the American non-profit agency National Bureau of Economic Research, Fitch said every percentage point increase in trade due to the closure of the Canal resulted in a 0.5 percentage point reduction in global trade.

The closer an economy is to the Suez Canal, the bigger the hit it takes due to rerouting. “Therefore, South Asia would be the worst hit, while Australasia will probably weather a closure relatively well,” Fitch said.