By Wai Ho Leong
Over the past three months, oil prices have fallen almost 24%.
Brent crude has declined from USD112.4/bbl at end-June to
US$85.6/bbl on 28 October. The WTI price has seen a similar drop.
This decline in crude oil prices has significant implications for
Asia, as the region remains largely dependent on imported oil.
Brent hit US$83/bbl in mid-October, and our commodities team is now
forecasting Brent to average US$93/bbl in 2015.
The immediate impact of lower oil prices will be seen in current
account balances, and in time should prove highly supportive for
inflation and growth, if the lower oil prices are sustained. Given
this, we revisit our estimates of the potential impact of lower
energy prices, notably oil, on Asia's macroeconomic outlook. Growth
in the Asia region continues to be fuelled by high oil consumption.
Malaysia is the region's only large exporter of energy commodities,
making it an exception when looking at the composition of external
balances.
We find that for every US$10/bbl fall in the price of crude oil
over a year, Asia's current account balance improves by
approximately US$4.4bn per month, other things unchanged. Based on
our current forecasts, this implies that if oil prices average
US$80/bbl over 2015, then Asia's current account surplus could
improve by almost 35% relative to our forecast of a US$451bn
surplus. While we do not adjust this analysis for the elasticity of
demand for oil, this does suggest upside risks to our current
account forecasts.
Our analysis also shows that the potential impact of lower oil
prices on economies would vary. The biggest positive impacts would
be seen for Korea, Thailand, the Philippines and India. Although
Singapore would also likely see a positive impact, its large
current account surplus means incremental gains would not be as
important. Broadly speaking, current account balances in Asia have
improved since 2013, and are likely to improve further over
2014-15. In addition, the currency stability of the past few months
against a backdrop of lower oil prices is likely to result in more
benign price pressures, which could stoke positive consumption
impulses. Malaysia is an exception, but even there, the benefits of
lower oil prices are likely to be seen in the form of lower fuel
subsidy spending, which should create space for counter-cyclical
fiscal policy, if required.
Who benefits soonest? A closer look at the oil-pass through
Oil prices have been volatile in 2014. In 1H, geopolitical fears
pushed prices higher, but from June prices have been falling. As
such, inflationary pressures across the region have receded, which
gives policymakers more flexibility in managing the rising risks to
global growth and inflation, in our view. Given the elevated
imported-oil intensity of production in Asia, lower oil prices mean
that the cost of living and doing business will likely fall in
coming months, which should help to support consumption. With the
exception of Indonesia and Malaysia, no other countries in the
region subsidise fuel, which implies that the pass-through of lower
oil prices into retail inflation should be rapid. Fuel has the
largest weighting in the consumer price indexes of India (9.5%),
Malaysia (9.2%) and Thailand (8%), which are also among the
economies most sensitive to higher oil prices. In the Philippines
and Singapore, the prevalent use of public transportation may
dampen the direct impact lower fuel prices on CPI inflation, but
electricity bills are likely to fall in coming months.
Inflation risks have moderated significantly, and CPI in Asia is
now at its lowest level since November 2009. Further, the declines
in other soft commodities, such as food, should help keep inflation
under control. Weather conditions have also been improving.
According to the Australia's Bureau of Meteorology, the risks of El
Nino like conditions have declined substantially. This is
particularly beneficial for economies like India and the
Philippines, which have high weightings for food in their CPI
baskets.
Lower oil prices will help support consumption in the region. We
expect the pass-through impact of lower oil prices on growth to be
somewhat slow, as retail prices could take some time to adjust,
especially in case of utilities. However, economies such as India,
Thailand, Taiwan and Korea, which have high oil intensities, should
eventually see a positive impact on growth, while Malaysia may
experience a negative growth shocks from its mining sector.
Wai Ho Leong is a Senior Regional Economist at Barclays based in
Singapore.
Email: asiaresearch@barrons.com