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.