Implications Of A Potential Oil Price Spike in Asia

Business Monitor International (BMI), in a report filed on Dec 14, opined that with oil prices continuing to drive higher on the back of still-strong global economic growth and ample liquidity, the risks to Asian countries' strong trade balances, economic growth, and (to a lesser extent) fiscal positions are growing. BMI assess the likely impact of a surge in oil prices back towards their all-time highs and believe that India is the most heavily exposed in terms of its balance of payments position and econ

omic growth, while the Philippines is also at risk

Emerging Asia's trade accounts have been soaring in recent months but a continued rally in oil prices poses a risk to this trend. Asia's oil import bill came in at an estimated US$42.0bn in September, up from a low of US$19.0bn in February 2009, and a return to the all me high of US$57.4bn seen in July 2008 would create significant pressures on regional trade accounts.

Furthermore, inflationary pressures could tick up, necessitating tighter monetary policy, which could squeeze growth across the region. Indeed, although BMI continue to highlight the strength of Asian consumers, oil prices may begin to weigh on consumer purchasing power. To some extent, the forecasts for 2011 factor in a slowdown in consumption growth, due in part to higher oil prices.

However, there is a risk that crude oil prices spike towards and beyond US$100/bbl. Given that the region has seen steady rolling back oil subsidies in recent years, this is less likely to pose a threat to government budgets compared with a similar period three years ago.

BMI believe that India is most at

risk from an oil price spike in terms of its potential impact on the country's balance of payments position. While the tough decision made in June to scrap petroleum subsidies will mean that the fiscal budget would be somewhat less susceptible, the impact on consumers could be more acute without the aid of subsidies.

Balance Of Payments Impact

BMI recently highlighted the precarious nature of India's balance of payments position, and an oil spike would compound these problems. At present, oil imports account for a worrying 30% of total imports (by far the highest in the region), although this figure is down from the high of 40% seen in July 2008. If crude oil prices were to spike back up towards the US$140/bbl level, BMI conceivably see In

dia's trade deficit surpass the 2008 high, leaving the currency heavily exposed to the downside.

South Korea appears to be another country highly exposed to an oil price shock in terms of its balance of payments. Oil imports represent 17% of total imports, and totalled US$6.4bn in October alone. At the peak in May 2008 this figure hit US$9.7bn, and the additional import cost of further price increases would be enough to push the trade surplus back towards deficit. Together with heightened political risks and the

impact of a slowdown in China, the Korean won could be susceptible to a sell-off. That said, BMI maintain the view that any sell-off would be mild given the cheap valuation that the currency has at present.

The Philippines is also at risk in terms of its trade balance, with the third-largest oil import bill as a share of total imports at 16%. While the trade balance is current in its best shape in 10 years, with a US$740mn surplus in September, this could quickly erode if the oil import bill were to rise back to peak levels. That said, BMI see no risk of any major instability in the balance of payments position in 2011 and expect the Philippines peso to remain well supported.

Inflation/Growth Impact

Inflation could become a more serious across the region should oil prices continue to march higher. While it appears that current inflationary pressures across Asia will be transitory, it is noted that the higher oil prices go, the more pressure this will put on consumer prices going into 2011.

The bigger problem would come in terms economic growth. Indeed, should consumer price pressures tick up as a result of an oil price surge, central banks across the region would likely act swiftly to tighten monetary policy, which would have a negative impact on economic growth and consumer spending. Again, it appears that India would be most exposed in terms of economic growth given its low level of GDP per capita.

The Philippines would also be particularly at risk from such an occurrence. With no subsidies in place to protect consumers and businesses against rising prices, and GDP per capita among the lowest in the region, consumer spending would likely take a sizable setback.

Fiscal Impact

On the fiscal front, Asian governments have increasingly rolled back fuel subsidies since the oil price peak of 2008, which should stand them in reasonably good stead in the event of a recurrence. China cut its fuel subsidies in 2009 and India removed sizable subsides for gasoline in June this year. Indonesia has also made positive steps by hiking fuel prices in the summer and proposing to phase out subsidies entirely over the coming years beginning in January 2011.

As such, and considering the solid fiscal position that Asian governments find themselves in, BMI see no major risks to fiscal credibility from surging oil prices. That said, Indonesia would likely be the most heavily exposed in terms of its fiscal accounts from an oil price surge given the fuel subsidies are the most pervasive in the region. Malaysia, India, and China would also see budget setbacks.