Mon, Jun 09, 2008 page12

• Analysts downplay impact of oil prices on economy

  CONTRARY VIEW Two economists said Taiwan’s current account surplus has not taken as big a hit as might be expected as energy prices soared over the past year

  • By Kevin Chen / STAFF REPORTER
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  Rising oil prices have threatened Asian economies with higher inflation and reducted profit margins, but Taiwan’s economy is “less vulnerable to an oil shock,” two Citigroup economists said in a research report last week.

  “As an economy whose dependence on imported energy increased over the years, Taiwan will suffer from rising energy costs to some degree,” wrote Cheng Cheng-mount (鄭貞茂) and Tina Liao, authors of the Citi Investment Research report.

  Taiwan imported more than 99 percent of its energy, with crude oil and other petroleum products accounting for 52.88 percent of the overall energy supply in the first quarter, the Bureau of Energy said in a statement on May 24.

  As global crude oil prices rose to more than US$139 per barrel last week, concerns have escalated that rising energy prices will hurt the country. But compared to its neighbors, Taiwan’s economy appeared to be less affected by oil price hikes, Cheng and Liao said.

  “The main reason probably was due to weak domestic demand such that GDP growth had been relying on net exports in recent years,” they wrote.

  Their observations were based on a study of Taiwan’s current account surplus and crude oil imports between 1996 and last year. The study showed that the current account surplus did not show a decline over this period even though oil imports rose from a less than 2 percent of GDP to more than 6 percent.

  As their finding was contrary to the belief that higher oil prices increase oil imports and thereby reduce the trade surplus, Cheng and Liao said: “Taiwan’s current account surplus was more linked to global demand and terms of trade.”

  Therefore, they believe that high oil prices would have more of an impact on net exports than on domestic demand, as reflected on the reduced current account balance.

  There was a US$8.66 billion surplus in Taiwan’s current account in the first quarter of the year, after exports increased 17.6 percent year-on-year over the same period amid strong Asian demand for Taiwanese goods, the central bank said on May 20.

  But that figure was down from a surplus of US$9.39 billion the year before.

  The Citigroup study showed that every US$10 increase in oil prices will lower economic growth by 0.2 percentage points and raise CPI by 0.5 percentage points, while lowering current account balance by 1.3 percentage points.

  The Directorate General of Budget, Accounting and Statistics recently predicted a 4.78 percent economic growth rate this year and a rise of 3.3 percent in consumer prices from a year earlier.

  Barring uncontrolled fluctuations in oil prices, “the impact on global demand and Taiwan’s current account surplus will be limited,” Cheng and Liao wrote.

  Even so, the Cabinet’s recent moves to raise fuel and electricity rates, coupled by continually rising crude prices, are likely to substantially impact consumer spending this year, they said. They predicted private consumption growth will drop by 1 percentage point, or a reduction of 0.6 percentage points in GDP growth, to 2.4 percent for the year, down from last year’s 2.6 percent.

  In this respect, policymakers may want to pursue pro-growth policies — such as infrastructure projects, preferential mortgage loans and cross-strait charter flights — to boost domestic demand and maintain economic growth, rather than focus on anti-inflation measures, Cheng and Liao said.

  But the Council for Economic Planning and Development said on Saturday that the government’s first priority would be to help stabilize consumer prices to contain inflation.
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