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ANALYSIS: Inflation, slow growth and tough exports await Asia

Asia faces the threat of higher inflation, slower growth and tougher times for exporters after oil prices hit new highs and the dollar plunged last week.

Farmers, miners and oil companies could profit from high commodity prices. But most of Asia depends on imported energy and raw materials and even oil exporters such as Malaysia have other industries that could suffer.

"We are seeing inflation pressure rising across the region and that's becoming a key challenge for the economies that also potentially face downside risks from a US slowdown," Citigroup economist Yiping Huang (黃一平) said in Hong Kong.

Japan, China and other export-driven economies that sell to the US market have watched earnings erode as the dollar falls. It dipped below ¥100 last week for the first time in 12 years and hit 7.1 yuan, its lowest level against China's currency since 2005, when the current exchange rate system began.

Toyota Motor Corp said its profit for this fiscal year would decline by about ¥35 billion (US$350 million) for each ¥1 that the dollar falls.

"With a high yen, exports are likely to come down, bringing down company profits and also bringing down stock prices," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities Co in Tokyo.

Such worries have sent Japanese stocks tumbling to two-and-a-half-year lows, fueling alarm among investors across Asia who are afraid the US -- a huge export market -- is sliding into a recession.

In China, exporters have been hit by higher costs and a 16.5 percent rise in the yuan against the dollar since the middle of 2005. Factories that depend on sales of low-cost furniture, toys, shoes and other goods to US consumers have laid off thousands of workers.

Commerce Minister Chen Deming (陳德銘) warned last week that export growth might slow if the yuan rises further against the dollar.

China has frozen retail prices of gasoline and diesel, shielding consumers from global crude prices that hit a record US$111 a barrel last week.

But factories and steel mills are being pinched as market-set prices of coal, iron ore and other materials surge. That rise in costs is hampering China's efforts to rein in consumer inflation that accelerated to 8.7 percent last month, its highest level in nearly 12 years. That was driven by a 23.3 percent jump in food prices that has hit China's poor majority hard.

Beijing has imposed price controls on food and is trying to increase production. But wholesale prices are edging up, suggesting consumers could face more across-the-board increases in living costs.

Vietnam, Indonesia, Malaysia and Sri Lanka also face a risk of higher inflation due to higher energy costs, HSBC economist Peter Morgan said in Hong Kong.

"They have pretty high inflation rates to start with," he said.

Asian buyers could be paying higher prices for oil, gold and other commodities for some time as global prosperity drives a boom in demand, said Tim Condon, chief Asian economist for ING in Singapore.

"We were in a bear market for commodities for the past 80 years, up to the beginning of the 21st century," Condon said. "We've been in a bull market for five years. I think there's more room to run."

On the bright side, poor farmers in Indonesia, Malaysia and Thailand are being paid more for rice, palm oil and other crops, said Marshall Gittler, chief Asian strategist at Deutsche Bank Private Wealth Management in Singapore.

"It's going to redistribute wealth in these countries and it may actually be a good thing for them," Gittler said.

Even oil producers such as Malaysia that stand to profit from higher prices face a downside.

Malaysia subsidizes retail gasoline, so rising crude prices will increase costs to its treasury, said Jeff Brown, managing director of FACTS Global Energy in Singapore. And he noted that Malaysia exports personal computers, chips and other technology goods to the US and Europe, where sales could slow as energy prices rise.

"So I would be reluctant to even say that Malaysia's a beneficiary" of the oil boom, he said.

In Japan, airlines have responded to soaring oil prices by raising fuel surcharges on tickets by up to US$42 per passenger, effective next month.

In Thailand, state-owned oil company PTT PCL has asked the government to cut the amount of fuel it is required to hold in reserve from 30 days' supply to 18 days. The company said that would avert possible diesel shortages by letting it sell cheaper stocks bought earlier without having to replace them at current high prices.

Also see: EU must accept dollar weakness
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