SINGAPORE, Aug 21: Asia’s oil-guzzling economies are bracing themselves for the worst as crude prices threaten to hit 70 dollars a barrel, stoking fears of slower growth, soaring inflation and rising interest rates.
Oil prices surged to an all-time high of 67.10 dollars a barrel on August 12, and while they have since pulled back to around 64 dollars, analysts said prices remain volatile due to strong demand and tight supplies.
The impact of rising prices varies across the region, with stronger economies like Japan, South Korea and Singapore expected to cope better than the poorer countries of Southeast and South Asia.
Philippine President Gloria Arroyo has ordered drastic steps to conserve energy, including reducing the number of vehicles in her own car convoy. Manila last year paid 4.57 billion US dollars for its oil imports.
“If we do not conserve, we will reach a point where the oil bill of the country is going to threaten the foreign exchange reserves,” said Philippines Energy Secretary Raphael Lotilla.
Economic Planning Secretary Augusto Santos said gross domestic product (GDP) this year would grow by 5.1 per cent instead of 5.3 per cent if oil remained between 60 and 70 dollars, while inflation would range from 5.7 to 8.1 per cent.
For Thailand, soaring oil prices would slash corporate profits as consumers tighten their belts, Macquarie Securities’ head of research Andrew Stotz said.
Other analysts said the economy would suffer from higher inflation, slower GDP growth and a wider current account and trade imbalance.
Even in Malaysia, a net oil exporter, analysts say the Kuala Lumpur Composite Index would fall below the psychological 900 points level if prices reached 70 dollars a barrel.
A leading Malaysian think tank last month cut its GDP growth forecast for 2005 to 5.1 per cent from 5.4 per cent.
Singapore, Southeast Asia’s most advanced economy, does not expect high oil prices to slow the economy.
South Asian economies would reel from 70-dollar oil.
Analysts in Pakistan warned inflation would top the government estimates of 8.0 per cent this year.
“The hardest hit would be fixed income groups, the middle class and the poor,” said economist Shahid Hasan Siddiqui, who heads the Research Institute of Islamic Banking and Finance.
Bangladesh, whose oil bill totalled 1.5 billion US dollars in the financial year ending June 30, said skyrocketing prices have already strained the country’s balance of payments position. Inflation is approaching 10 per cent.
Sri Lanka’s annual average inflation jumped to 12.7 per cent this month, up from 4.3 per cent a year ago, mainly due to higher oil prices, the central bank said.
Vajira Premawardhana, Executive Director at LOLC Securities, said the government may try to keep retail prices artificially low because of impending elections.
But economist Harsha de Silva said it would be difficult.
“Who’s going to pay for the free lunch? Something has to give in, either exchange rate or inflation,” de Silva said.
Northeast Asia’s buoyant economies are likely to cope better.
Analysts in South Korea said the impact of 70-dollar oil on the stock market and broader economy would be limited.
“The impact from high oil prices on the economy is smaller than the past as both the global and the domestic economy are getting used to expensive crude oil,” said Shin Min-Yong of LG Economic Research Institute.
“But high oil prices could spark uncertainties in the stock and bond markets and could affect the real economy.”
Analysts said Japan’s stock market would look at how high oil prices affect the United States.
“If higher oil prices act as a drag on the US economy and people tighten their consumption, the Japanese stock markets will likely be impacted,” said Ryuta Otsuka, strategist at Tokyo Securities.—AFP
