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Oil prices the main risk for Asia: IMF

Robust energy demand from Asia will help keep world oil prices high and this could result in slower economic growth in the region, the IMF chief said yesterday.

IMF managing director Rodrigo Rato said Asia could expect to maintain its solid economic performance provided authorities kept a tight watch on monetary policy to prevent oil-linked inflation from choking growth prospects.

"The growth in Asia has been remarkable," the former Spanish finance minister said from Washington in a video conference with Asian journalists ahead of his trip to the region next month.

"There are risks of course and the most important risk is, at this time for Asia, oil prices.

"We have seen that the impact of oil prices has been mild at this moment but we believe if the high oil prices persist and we believe that they will, Asian growth could be affected."

At 2pm yesterday, New York's main contract, light sweet crude for delivery in October was up US$0.21 at US$67.53 a barrel from its close of US$67.32 in the US on Wednesday.

The contract touched a new all-time high of US$68 a barrel in after-hours electronic trading as a tropical storm threatened production platforms and refineries in the US Gulf Coast.

New York futures have now rocketed by 164 percent since August 2002, when they stood at just US$25 per barrel. They have jumped 61 percent since August last year.

Already, some countries in the region like Indonesia and the Philippines are feeling the pinch from higher fuel bills and policymakers must act to clamp down on inflation, Rato said.

"At the same time, what is clear is the increase in oil import bills has been considerable and this is already putting pressure in many countries in balance of payments. And in that respect, we think they have to be extremely careful," he said. "Certainly in Asia, it demands monetary policies to be vigilant in some countries like Indonesia and Philippines, maybe more vigilant than in others.

"As a general rule not only for low income countries but also for all countries, monetary policy will have to remain extremely vigilant to limit any second round effects on inflation produced by the hike in oil prices," he said.

As energy bills increase, countries must not resort to subsidizing oil prices, he said, adding that oil subsidies may be "politically very popular"domestically but in the longer term creates a burden on the economy.

"We see clearly that governments have to make consumers and companies aware of the true prices," Rato said. "This is not going to be just a short-lived increase in the oil prices."

He said strong demand from the US, which is the world's biggest oil consumer, and the economic emergence of China and India are among the main reasons behind the hike in the cost of crude.

"Contrary to all the situations in the past that were very much related to reduction of supply, the main reason for the actual oil prices are certainly demand forces," Rato said.
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