If crude oil prices stay high for an extended time — and that remains a big if — Asian countries from China to India might not be able to sustain the growth pace that has driven the global economy.
While projections based on uncertainties such as oil prices and the Middle East’s future must come with big caveats, in some worst-case scenarios inflation could double and growth rates halve in parts of Asia. That would deprive the world of a growth driver just as developed countries start to get back on track.
If high prices persist, “Without a doubt, Asia could take a hit. It faces a big problem — and that will be a problem for everybody,” said Sanjay Mathur, an Asia economist in Singapore for RBS.
In a report, Mathur and RBS economist Erik Lueth estimated that at $120 a barrel, the oil price would shave off 1.5 percentage points off growth this year for Asia ex-Japan. Their baseline, with $80 a barrel oil, is for 8.2 percent growth, which drops to 6.7 percent for $120 a barrel.
On Monday, New York crude reached its highest level since September 2008. At 0645 GMT, it was up $2.02 to $106.44 a barrel.
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If oil stays around $120 a barrel this year, RBS predicts that South Korea’s growth rate could fall to 1.6 percent from the projected 4.2 percent. China’s growth, meteoric in recent years, would be cut to 8.8 percent from 10 percent while India would have 6.0 percent growth rather than 8.1 percent. Taiwan could see only 1.3 percent growth rather than the 4 percent that RBS forecast based on $80 oil.
RBS said India could see 2011 inflation double to 14 percent from the currently predicted 7.2 percent, while Indonesia’s could hit 13.9 percent from a forecast 6.3 percent.
In 2008, when oil spiked to above $100 for the first time, inflation rose in Asia while some governments pretended the increase was just a blip. RBS said that inflation was 6.5% regionally.
“We would need to see an average Brent oil price of around $120-125 a barrel in 2011 for the magnitude of the oil shock for Asia to reach 2008 proportions,” Citi said.
Costly oil should not be a devastating blow To Asia, and the effects would vary in a region with both oil producers and importers. Also, Asian economies have differing rates of energy efficiency and oil usage, as well as varying susceptibilities to inflation and capabilities to battle it.
Broadly, high oil prices pose several risks for Asia. They could spawn slower global growth that cuts demand for the region’s exports. If consumers in developed economies, already dealing with government austerity programmes, reduce their purchases, Asian exporters will feel some pain, as could consumers in the region.
“U.S. consumers, faced with another shock at the pump, will cut back on trips to the mall. Therefore, it all circles back to Asia eventually,” wrote HSBC economists Frederic Neumann and Sherman Chan.
Also, consumer spending in Asia could be hit as its households face higher inflation and also spend more on fuel.
Some governments such as Malaysia and Indonesia have strong enough fiscal positions to help lower-income citizens cope with higher food and energy costs. But others, such as India and the Philippines, cannot maintain or increase subsidies. Higher oil prices indirectly can exacerbate cost problems, for instance by pushing up the price of fertilisers.
Although there currently are threats to Asia’s growth, the HSBC economists said there was “no need to panic: the spike in crude prices in itself is not going to knock out Asia overnight.”
While high fuel costs would slow domestic consumption in Asia, there may be ameliorating factors. In China, for example, wage rises might cover any increases in fuel prices. Also, the country is a large coal user, which contains its oil usage.
Capital Economics has said that in Malaysia, Thailand and Indonesia, fuel accounts for 10 percent or more of the consumer price basket, and passing on the current year-on-year oil price rise in full would add four percentage points to the headline inflation rate.
HSBC sees China, India, the Philippines, Thailand, Taiwan and Vietnam as at risk from inflation given their high correlation between energy prices and core CPI. However, some of those countries have fuel subsidies that shield the consumer from price rises.
The Indian government would be forced to deregulate diesel prices if global crude touches $150 to $160 a barrel, Kaushik Basu, chief economic adviser in the ministry of finance said on March 3.
India is one of the top risk countries in terms of the cost of subsidies, according to Citibank research.
Risks for oil price shocks appear greatest in India and Pakistan, which already have “very high” deficits and “do not have sufficient offsetting oil revenues to provide a cushion,” Citi economists Johanna Chua and Wei Zheng Kit wrote.
Indonesia and Malaysia have large fuel subsidies, but are cushioned to some degree, thanks to having oil exports. JP Morgan noted that the fiscal cost for Indonesia should be manageable even with oil at $120 a barrel.
Another factor is the efficiency of energy use. Capital Economics says that Malaysia, Vietnam and Thailand use two to three times as much oil to produce a unit of output as the region’s high-income economies.