Oil price hike will cut Asian growth: ADB

Oil price hike will cut Asian growth: ADB

Mynardo Macaraig, Agenece France-Presse, Manila

Higher oil prices, if sustained, could sharply cut economic growth in Asia and trigger spikes in inflation and interest rates, the chief economist of the Asian Development Bank (ADB) said on Wednesday.

Economist Ifzal Ali also warned that even if geopolitical uncertainties pushing prices higher were resolved, growing demand would still keep oil at a floor price of between US$33 to $36 per barrel.

Among oil-importing economies in the region, China, Hong Kong, India, South Korea, Malaysia, the Philippines, Singapore and Thailand would be the worst hit, the ADB said.

"If oil prices are going to persist at $50 per barrel, there are going to be some important downsides that are going to result," Ali told AFP.

Higher oil prices would cause cost-push inflation which in turn will result in "high interest rates in all the countries in the region."

This will then undercut household consumption which has been fulling growth in many Asian countries.

More troubling is the possibility that higher inflation and interest rates could "snuff out" the recovery in business investment that has taken place in Southeast Asia this year, Ali said.

His remarks came after crude oil futures prices surged above the psychological $50 per barrel level on Tuesday.

Ali said that because of their high foreign exchange reserves, Asian countries would probably not suffer liquidity problems even if oil prices remained high.

At the same time, these countries should make "major structural changes regarding the efficiency of energy use," to ensure they remain competitive.

Using a baseline of $30 a barrel, the ADB said in a recent report that a sustained rise of $10 a barrel above that mark would see developing Asia's gross domestic product (GDP) growth pared back by 0.8 percentage points this year. Inflation would rise 1.1 points and the trade balance would swing to a deficit equal to 0.4 percent of total output.

Under the bank's worst-case scenario of a sustained $20 price rise above the baseline estimate, regional growth would be trimmed by 1.5 percentage points and inflation would rise 2.0 points.

For Thailand, a sustained $10 price rise would cut 2.2 percentage points off its estimated GDP growth for this year and push up consumer prices by 1.5 percent.

The Philippines would be the next hardest hit, with 1.9 percentage points lopped off its GDP growth rate and a 1.4 percent increase in consumer prices, the ADB report said.

China would see a 0.8 percentage point reduction in its projected growth rate and a 0.5 percent increase in consumer prices.

Oil-rich Indonesia would only see a 0.1-percentage point cut in its growth rate but Ali warned that the high fuel subsidies in that country could unbalance the budget if oil prices remained high.

The ADB advised Asian governments to consider phasing out fuel subsidies and adopting measures to boost efficiency. They should also consider incentives to develop and use alternative energy resources.

Asian economies are more energy intensive and less energy efficient than industrial countries, and are growing faster than the rest of the world, the ADB warned in its report.

While the region produces 11 percent of total world oil supply it consumes about 21 percent, meaning that it now imports more than 44 percent of its oil consumption.