International -- Asian Business: The Economy
Severe Oil Shock (int'l edition)
Asia may get hit the worst
Bupha Sahaphong, 54, doesn't follow the global oil futures markets that closely. But the Bangkok housewife has felt the impact of the recent stratospheric rise in oil prices right in the billfold. A year ago, it cost her $14 to fill up her tank. Now, it's more like $23--and she has to swallow the fuel bills for her two kids who drive, too. Recent swings through the grocery store also fill her with angst. "Now, the price of vegetables is up," laments Bupha. "Soy sauce is up, everything is up."
If there is a regional economy most vulnerable to soaring oil prices, it's Asia. More dependent on foreign oil and energy-consuming manufacturing than the West, Asian countries are also more vulnerable to oil shock. While the crisis hasn't yet reached the level of the 1970s, higher prices are packing a wallop. According to London-based economic consultancy IDEAglobal, if oil prices this year end up averaging $30 a barrel, it will lop off 0.5% of Asia's regionwide growth. Merrill Lynch & Co. knocks a full percentage point or more off the growth of the most vulnerable economies, including Thailand, Taiwan, and South Korea, if the supply-demand imbalance stays severe. "Oil prices may be in no hurry to decline," says energy analyst Sadiq Currimbhoy.
Nobody knows for sure. But in a region still recovering from financial crisis, banking sectors, corporate balance sheets, and consumer sentiment are still fragile. A World Bank report released on Sept. 18 spelled out the worst-case scenario: An oil shock kills demand; companies that can now pay their debts once more go under; governments pull back social spending; and investors cut and run.SPOOKED. It would take a sustained period of oil prices in the $40 range to push Asia and the rest of the global economy into a '70s-like pattern of soaring inflation, high interest rates, and snail-paced growth. But even at current prices, oil will have an impact by eating away at consumer spending power. Those shortfalls may not spread to the entire region: The impact on Japan would be negligible, where deflation, not inflation, is the worry. On the flip side, oil exporters such as Indonesia and Malaysia might even get an additional 1% of growth next year.
Market investors are spooked, though. The worry that depressed consumer spending could dampen corporate earnings and set back Asia's recovery is being played out in the region's bourses. Predictably, investors have started dumping airline stocks, as well as those of carmakers and heavy manufacturers. Hong Kong-listed China Southern Airlines Co. has fallen 27% in the past month on worries that the carrier didn't effectively hedge on oil contracts. Singapore Airlines, the most profitable carrier in the region, is considering raising fares as investors continue to knock down its share price--by 12% since mid-August.
It's easy to see how consumers are getting pinched. China's big oil refiners, such as PetroChina Co. and Sinopec, are passing along their increased costs to consumers, who have already suffered through seven fuel price increases since last November. A Sept. 18 price hike pushed up the average gasoline retail price by 4%. With Beijing taxi drivers threatening a massive strike, Beijing has provided a $12-a-month subsidy to keep them in line. Still, China is relatively well off. Even if oil prices stay in the $35 range, China would still manage to grow 7.5%, figures Merrill Lynch senior international economist Michael Hartnett.
Contrast that with Thailand. Normally, higher oil prices don't slam banking stocks. Yet they do there, where the banks' nonperforming loans are still hovering at $37 billion, or 30% of gross domestic product. Since mid-September, shares of Bangkok Bank have fallen 10% on worries the World Bank spelled out--that the impact of higher oil prices on heavily indebted Thai companies will push more into default. "When three-quarters of the country's production base depends on the price of imported oil, it affects everything," says Bangkok-based oil consultant Sam Cohen.
In South Korea, the energy shock comes on top of inflationary pressure that has been building up over the past year. In 1999, the economy managed 10.7% growth with inflation of 1%. This year, inflation has crept up to more than 2%. The LG Economic Research Institute predicts that if oil prices stay at $30 a barrel, it could add half a percentage point to the inflation rate. At that point, the Bank of Korea would probably step in with an interest rate hike to cool things off.
Cash-strapped governments such as India and Indonesia face a different dilemma. Do they increase their sizable budgets by keeping energy subsidies in place or pass higher fuel costs on to consumers? New Delhi right now spends $2.2 billion on subsidies for diesel fuel and kerosene used by transportation companies. Its budget deficit, already 6.5% of GDP, could go to 7% if oil prices stay high. That could force the government to boost diesel prices by up to 20%, which would raise freight costs and consumer prices in a country where inflation is already 6% this year.
And although Indonesia is a net exporter of oil, and the region's only OPEC member, it is caught in the same dilemma. It's a net importer of diesel fuel, which, thanks to government subsidies, sells at the low price of $15 a barrel, vs. $40 on international markets. But that game is set to end, given earlier pledges to the International Monetary Fund to start phasing out the subsidies by November. When that happens, prices of petroleum products are expected to increase by 12.5% across the board--a move that will surely hurt what little consumer confidence is left in Indonesia.EXCEPT JAPAN. Perhaps the best news out there is that the region's biggest economy, Japan, will come out relatively unscathed. It's one of the few countries in the region to boast a well-managed strategic petroleum reserve. "We have enough to cover 150 days," says Kazuhiko Koshikawa, deputy press secretary to the Prime Minister. J.P. Morgan & Co. predicts the spike in prices would shave only 0.05% off Japan's economic growth next year.
The worry, though, is that corporate earnings could eventually take almost 2% off overall profit growth in 2001. Teijin Ltd., a fiber and plastics group, has so far been able to pass along higher oil prices to customers in key fiber products. But Teijin President Shosaku Yasui does worry about the outlook if prices stay at $35 a barrel for the foreseeable future. "Then it turns into a big problem," he says. And not just for manufacturers like him, but for Asia's taxi drivers, bankers, shareholders, and consumers alike. For a region that has just crawled out of the abyss, that would be a cruel twist of fate indeed.By Brian Bremner in Tokyo, with Daniel Lovering in Bangkok, Michael Shari in Jakarta, and Bureau ReportsReturn to top