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.