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Asia braces for more hits from oil prices

Asia's oil-guzzling economies are bracing themselves for the worst as crude prices threaten to hit US$70 a barrel, stoking fears of slower growth, soaring inflation and rising interest rates.

Oil prices surged to an all-time high of US$67.10 a barrel on Friday, Aug. 12, and while they have since pulled back to around US$64, 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.

Analysts in South Korea said the impact of US$70 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," Shin said.

Analysts said Japan's stock market would look at how high oil prices affect the US.

"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.

Japan spent US$55 billion on oil imports last year.

Singapore, Southeast Asia's most advanced economy, does not expect high oil prices to slow the economy.

Analysts in China said the impact of high oil prices on the stock market would be mixed.

"Enterprise will pass their extra costs on to the consumers. But energy-consuming items such as cars make up a relatively small part of the typical consumer basket, so the impact on private consumer spending will be limited," said Niu Li of the State Information Center, a government think tank.

For Taiwan, US$70 oil prices would hurt economic growth and fuel inflation, said Norman Yin (殷乃平), a professor at National Chengchi University.

"If the upward trend of oil prices continued, the [impact] on the economy would be particularly felt from the third quarter," Yin said.

Taiwan's GDP grew a less-than-targeted 3.03 percent in the second quarter to June due to record high oil prices and interest rate hikes, the Directorate General of Budget, Accounting and Statistics (DGBAS) said on Thursday.

DGBAS, however, raised its GDP forecast for this year to 3.65 percent from the 3.63 percent projected in May due to an easing in unemployment rates and more consumption.

Philippines 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 US$4.57 billion 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 GDP this year would grow by 5.1 percent instead of 5.3 percent if oil remained between US$60 and US$70, while inflation would range from 5.7 to 8.1 percent.

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 hit US$70 a barrel. A leading think tank last month cut its GDP growth forecast for this year to 5.1 percent from 5.4 percent.
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