Asian economies hit oil patch as prices stay high
Asian economies hit oil patch as prices stay high
SINGAPORE (Reuters): Despite the weekend agreement by OPEC to
boost output by 800,000 barrels per day, analysts envisage
sustained high energy prices and a knock-on impact on highly oil-
dependent Asian economies.
If prices stay around current levels, Asia's key macroeconomic
variables such as trade balances, inflation, fiscal balances and
growth would inevitably be hit, analysts said.
On the micro level, much-needed corporate reforms taking place
across the region could be derailed as high oil prices bite into
corporate profits and raise the cost of recapitalizing.
"Asian growth is driven mostly by exports, by their trade
surpluses. What rising oil prices will do is to eat into that,"
said Bhanu Baweja, regional economist at IDEAglobal.com.
"It also affects consumers' wealth through high prices, and
consumer expectations. If they feel less wealthier, they will
spend less," he said.
And it looks like the prices could be around the current
levels for a while.
"Even though the OPEC commits to raise oil output by 800,000
bpd, we don't think the actual increase would be more than
363,000 bpd due to production constraints of some cartel
members," said Nithi Wanikpun, oil analyst at Merrill Lynch.
The Organization of the Petroleum Exporting Countries met on
Sunday in Vienna and agreed to lift output by 800,000 barrels per
day (bpd), slightly above pre-meeting expectations of 700,000
bpd.
But given low stocks levels in the U.S. and some other
industrialized countries, the scope for oil to fall back to
OPEC's target range of $22-28 per barrel is fairly limited.
Crude oil prices during the January-August period already came
in more than 50 percent higher versus the same period a year ago,
on top of substantial rises in 1999.
q Paul Alapat, chief economist at Nomura International said
Asia's vulnerability to crude oil price volatility has multiplied
over the past decade.
According to Nomura's data, Asian oil consumption between
1990-1999 increased by 6.3 million barrels per day or 80 percent
of global increase in demand.
Oil production in Asia has increased by only 900,000 bpd,
leaving a production-consumption shortfall of close to 12.3
million bpd in 1999.
Like Japan and Taiwan, South Korea is among the most
vulnerable.
Analysts estimated each $1/barrel rise in the oil price could
shrink Korea's current account surplus by $800-900 million.
"We estimate the increase in oil prices recorded to date will
push the South Korean current account into deficit within a
year," Alapat said.
Declines in external surpluses and erosion of fiscal revenues
would put restructuring programs in Thailand and public finances
in the Philippines in great danger, he said.
Manila's budget deficit had already badly overshot a target in
the January-July period.
If oil prices remain high, analysts said the 2000 deficit
could exceed 100 billion pesos while the official full-year
target was set at 62.5 billion.
Singapore is perhaps the least vulnerable. The country's oil
imports are mostly for re-export, and its oil domestic
consumption is estimated at a manageable one percent of GDP.
While shrinking trade surpluses may harm Asia, some analysts
reckon the real danger will be indirect impact in the form of a
global economic slowdown.
An OECD study indicated a $1 per barrel rise in oil prices
would slow the U.S. economy by 0.025 percentage point.
Merrill Lynch said if oil prices remained at $33 per barrel
next year, the global economy could drop below three percent and
that would hurt Asia substantially.
However, the company still keeps its average oil price (West
Texas Intermediate) forecast unchanged at $28 per barrel for this
year and $23 for next year.
Recent data showed rising petrol prices have finally filtered
through to customer prices, which rose almost across the region
in August.
Analysts said rising inflationary pressure could put some
Asian countries in a bind because governments would risk hurting
their highly-leveraged economies if they raise interest rates.
South Korea's month-on-month figures show a sharp pick-up in
prices. Salomon Smith Barney said it expected Korea's core
inflation to hit the central bank's target of 2.5 percent in
September.
In Thailand, the rise in domestic prices could have been more
pronounced had it not been because of temporary subsidies and
price controls -- benefits of an election year.
Even a net oil exporter like Indonesia will also be hit.
Although the country will enjoy a surge in export revenues, its
consumer prices might creep up and raise political risks.
The country has been under pressure from the International
Monetary Fund to cut local oil subsidies. Its central bank had
indicated it would soon raise this year's inflation target to
seven to eight percent from five to seven previously.