08-05-2018

Analysis: Oil’s rally pinches Asia, but many economies more resilient than ever

Oil has climbed to a level where Asian countries are starting to see fiscal imbalances creeping in and is threatening to take a toll on demand, but many economies in the region have strong macroeconomic fundamentals to absorb the oil shock better than in the past when prices skyrocketed.

Analysts told S&P Global Platts that while oil’s rally is bringing back sleepless nights for countries like India and Thailand, others, such as China and Malaysia, might feel the pinch to a much lesser extent.

“A further rise in oil prices would put upward pressure on transport and energy inflation in the region,” said Vishrut Rana, Asia Pacific economist at S&P Global. “That said, external positions in Asia have improved over the past few years, aided by more flexibility in exchange rates.”

First quarter oil demand numbers in China and India have shown that demand has been resilient despite rising oil prices.

China’s apparent oil demand grew 6.8% year on year in Q1, much higher than the 4.1% growth seen in Q1 of 2017. In India, oil products demand in Q1 grew 8.5%. The growth in consumption occurred despite Brent crude prices maintaining an upward momentum. Crude has risen 68% since late June 2017 to three-and-a-half-year highs of above $75/b.

“For Asia as a whole, the dampening effect of higher oil prices has not been apparent in Q1 2018, when Brent prices averaged $67/b. The effect on oil demand should become more obvious over the next few quarters,” said Lim Jit Yang, director for Asia at S&P Global Platts Analytics. But he added that strong economic activity should continue to support oil demand in Asia in the longer run.

ASIAN GROWTH

Low oil prices and robust economic growth over the past three years have supported Asian oil demand, with annual growth in the region averaging 1.2 million b/d over 2015-2017, up from 750,000 b/d in 2012-2014, when prices were considerably higher.

But in 2018, Platts Analytics expects Asian oil demand growth to ease to 1 million b/d, partly because of higher fuel prices.

“Demand destruction is already happening to some extent in Asia. But Asian economies are in much better shape now. So I don’t expect oil demand to collapse,” said Jeff Brown, president of Facts Global Energy.

Economists said that Asian economies were better placed to handle any kind of oil price shock this time, compared with previous years, including 2008 when crude oil had surged to a record $147/b.

“Balance of payment funding risks [in India] have risen in the short-term, following the unexpectedly weak export performance so far, rising oil prices and a cautious outlook for portfolio flows,” Priyanka Kishore, lead Asia economist at Oxford Economics, said in a research note.

“That said, fundamentals remain in much better shape compared to 2012/2013. The dynamics would turn more worrisome if oil prices continued to rise by even more,” she added.

Dharmakirti Joshi, chief economist at CRISIL, a unit of S&P Global, said with India dependent on imports for more than 80% of its crude oil requirements, a $10/b rise in prices can increase the fiscal deficit by 0.08% of the GDP. He said the impact of rising oil prices on the current account deficit was already visible.

India’s current account deficit as a percentage of GDP shot up to 2% in April-December 2017. CRISIL expects CAD as percentage of GDP to be at 1.9% for fiscal 2017-2018 (April-March), up from 0.7% in the previous fiscal year.

“The Indian government can reduce the impact of rising oil prices on consumer prices by cutting the excise duties on petrol and diesel. However, this could amount to pressures on the fiscal deficit, which is already under strain,” Joshi added.

LIMITED IMPACT

Although Malaysia has become a small net oil importer, it remains a major exporter of LNG, the price of which is influenced by oil prices.

“We estimate every $10/b increase in the price of oil would widen the trade surplus [in Malaysia] by about 0.4% of GDP, which would help to keep the current account in a comfortable surplus,” Nomura said in a research note.

Commenting on the impact on Indonesia, Nomura said that every $10/b increase in the oil price would lower the trade balance by 0.2% of GDP.

China’s overall balance of payments remains robust. Therefore, its growth should prove less vulnerable to the shock of high oil prices. It should also have limited impact on CPI inflation, given the smaller weight of energy-related items in the CPI basket, Nomura added.

The Philippines and Thailand would be hit hard because of higher oil prices, while the impact on South Korea would be moderate, it added.

After climbing to 2015 highs in May of that year, crude oil prices started to fall and some Asian countries saw that as an opportunity to rein in their fuel subsidy bill and implement taxes for fiscal gains. They did it by reducing retail oil product prices at a much slower rate than the rate at which global crude oil prices fell.

While China tweaked its product pricing mechanism to abandon retail price cuts when its reference crude basket price drops below $40/b, India implemented a series of excise taxes on retail fuel prices. Vietnam implemented an environmental protection duty on oil products from May 2015.

Those policy steps by Asian countries seeking extra revenue in the low oil price environment did not hurt end-users. As a result, demand remained robust.

“But now, governments in some countries are feeling the stress from the revenue point. We are seeing some Asian countries asking their oil companies not to raise prices. One has to see to what extent governments can absorb the price rise and to what extent they pass on to consumers,” FGE’s Brown said.

Source: Platts

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