India, Turkey Hurt Most by Rising Oil Price, Morgan Stanley Says

India and Turkey are “most negatively” affected by rising oil prices because the countries run high current-account deficits and are net importers of the commodity, according to Morgan Stanley.

“A sustained rise in commodity prices will also bring about higher input costs, which could revive upside risks to inflation” for Asia, excluding Japan, Morgan Stanley analysts led by Chetan Ahya and Jonathan Garner, wrote in a report dated yesterday. “If the upside risks to inflation materialise, the tactical easing in monetary policy that we are forecasting may be delayed.”

Oil prices climbed to $109.77 a barrel last week, the highest level since May 3. Crude costs will become the next “risk item” for investors as European debt concerns ease, according to UBS AG. While India buys three-quarters of its oil from abroad, Turkey imports almost all of its energy requirements, according to the Ankara-based statistics office.

“Oil prices are already approaching levels where worries have arisen in the past,” Larry Hatheway, London-based chief economist at UBS, wrote in a report today. “For oil-consuming countries, rising prices will begin to crimp purchasing power.”

Indian stocks have rallied this year, with the benchmark BSE India Sensitive Index climbing 15 percent as foreign funds poured a net $7.1 billion into local equities amid optimism slowing inflation will prompt the central bank to cut interest rates. The Istanbul Stock Exchange National 100 Index has risen 15 percent in 2012.

Shielding Growth

The Reserve Bank of India has signaled readiness to join emerging markets from Brazil to Indonesia in cutting borrowing costs after inflation slowed in January to the lowest level in more than two years. Pressure to shield the economy is rising after the government forecast the smallest expansion in three years as the global recovery falters and officials struggle to restrain budget and trade deficits.

India’s government said in December that it may fail to meet its budget-deficit target of 4.6 percent of gross domestic product in the year to March as it struggles to sell stakes in state companies and a slowing economy lowers tax collection. The country is expected to run a current-account deficit of 2.7 percent of GDP in 2012, Morgan Stanley said.

“The impact of higher oil prices will also be partly felt on the fiscal balances for India, Indonesia and Malaysia due to the provision of fuel subsidies,” the Morgan Stanley analysts said. “India’s twin deficits means that its balance sheet is the weakest to absorb the impact of higher oil prices.”

India, Indonesia, Malaysia and Thailand, Asia’s biggest fuel subsidizers, will probably all miss fiscal deficit targets due to higher oil outlays, Bank of America Merrill Lynch said in a note in March last year.

Morgan Stanley is overweight on emerging-market energy stocks and likes capital goods and software makers, according to the report. Transportation industry has most stocks hurt by rising oil prices, the report said.

Ahya is a Hong Kong-based economist while Garner is chief Asia and emerging-market strategist for Morgan Stanley.

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