Asia is more vulnerable to oil prices than others
Asia is more vulnerable to oil prices than others
SINGAPORE (Dow Jones): Despite efforts by Asian nations to insulate their economies from the pain of rising oil prices, their growth is likely to be crimped, which will further depress their already battered currencies.
"Asia is more vulnerable than most other regions of the world to rising oil prices because it is hugely reliant on imported crude, and is the manufacturing hub of the world," says Pieter van der Schaft, economist at Barclays Capital.
The region also consumes oil at a far higher rate per capita than Europe or the U.S. because many nations are developing, and lack efficient infrastructure.
The International Monetary Fund in its recent World Economic Outlook said a rise in average crude prices to US$30 a barrel in the second half of this year from $25 per barrel in the first six months would curb Asian growth by 0.4 percentage points, compared with a 0.2 percentage point decline in industrialized economies.
The inflation pickup in Asia would also be more dramatic.
While authorities from the Philippines, India, and Thailand are seeking to limit the impact of higher prices on consumers, these may create as many problems as they solve, says van der Schaft.
"If oil prices spike up it is better to let the economy adjust to this by reduced consumption rather than using subsidies, which distort the use of capital," he says. "An exogenous shock like this might also help some of these economies become more efficient in their oil usage."
Economies most vulnerable to rising oil prices are South Korea, the Philippines, Thailand and India, which are all heavily reliant on imported oil for their energy needs. Because oil is settled in U.S. dollars, importers must sell their domestic currencies and buy dollars to pay for supplies.
Therefore it is no surprise that the peso and rupee have plunged this year to all-time lows against the dollar as oil prices rose, while the baht is at its lowest rate since the depths of the Asian currency crisis in 1998.
The won, however, is steady due to massive inflows of foreign direct investment.
To ease pressure on the peso, the Philippine Central Bank plans a currency risk protection facility for unhedged borrowers, including oil companies, which it hopes will reduce the need for them to buy dollars on the Manila market.
India, meanwhile, plans to borrow to help finance subsidies of domestic petroleum products, but this is problematic whether the government taps onshore or offshore markets.
Thailand is taking a similar, although scaled down, approach, extending subsidies on diesel prices for farmers, and truckers, and keeping refining margins low at state refineries.
South Korea, however, is using a more novel way to lower its energy bill.
Starting last month, all government employees whose vehicle license plate numbers end in the same number as the day of the month are banned from using their cars on that day. Seoul said this is the only measure available, and hopes it will save $170 million a year. Korean imports of crude oil are second only to Japan in Asia.
Barclays Capital estimates if oil averages $30 per barrel in 2000, up from $17 per barrel last year, Korea's current account surplus - all other variables being equal - would be cut 3.9 percentage points as a proportion of gross domestic product.
In these terms, Korea is the most exposed economy in the region to such an oil price rise, followed by the Philippines and Thailand at 2 percentage points, Taiwan (1.8), India (1.5) and China (0.8). Indonesia and Malaysia are net oil exporters.
But van der Schaft says Asian currencies won't necessarily rebound when oil prices recede, perhaps after the Northern Hemisphere winter.
"That won't be a certain cure for them, they are also being hurt by political uncertainty in the Philippines and Thailand, and if NASDAQ weakness continues, this reduces the risk appetite of investors globally," he says.