News Analysis: Lofty Oil Prices Raise Fears for Asia's Economic Recovery

Despite the recent agreement by OPEC to boost output by 800,000 barrels per day, crude oil prices on the international market are still staying above 30 U.S. dollars a barrel, raising fears that Asia's economic recovery may be derailed.

Many economists share the view that the impact of soaring oil prices won't be enough to cause a turnaround in the region's economic recovery in the near future as growth is still robust, exports are expanding, trade balances are mostly positive, inflation is largely in control, and domestic demand is picking up, though a little bit slowly.

But Asian countries are feeling more and more the heat from the surge in oil prices as the region remains highly dependent on oil. With recovery on track, Asia's oil demand is rising. It is estimated that in the first half of this year, oil consumption in the region has already jumped by 600,000 barrels per day.

High oil prices have raised oil import bills of most economies, except Malaysia and Indonesia, which are net exporters of the commodity.

Take South Korea and the Philippines for example. In the first seven months, South Korea's oil import bill reached 14.1 billion dollars, more than double that of the same period last year. JP Morgan in Singapore estimates that South Korea's oil imports this year will rise to 23 billion dollars from last year's 14.8 billion dollars.

The Philippines' oil imports in June surged to 344 million dollars, compared to only 197 million dollar for the same period last year.

Experts estimate that high oil prices are likely to raise Asia's collective import bill by about 20 billion dollars next year.

Rising oil import bills have led to a fall in some countries' trade surpluses, thus weakening their abilities of serving debts and increasing imports. The South Korean government forecasts that the country's trade surplus this year will shrink to 10 billion dollars from last year's 24.5 billion dollars.

The Central Bank of the Philippines also says that this year's trade surplus for the country will probably nose-dive to 8.5 billion dollars from 24 billion dollars in 1999.

Morgan Stanley Dean Witter estimates that every rise of one dollar in the oil prices would shrink East Asia's trade surplus by more than two billion dollars a year.

Meanwhile, rising oil prices are pushing up overall costs, exerting pressure on the region's central banks to hike interest rates which will slow down the pace of recovery.

For instance, Indonesia's inflation in July went up to 4.56 percent from June's 2.14 percent. The Indonesian central bank has hinted that the country's yearly inflation will reach 7.67 percent, exceeding the 5-7 percent target.

Philippines' August inflation rose to 4.6 percent from the previous month's 4.2 percent, while Thailand's is also likely to increase to 2.6 percent from 2 percent. And Malaysia is considering a hike in fuel prices in a bid to ease the burden of subsidies.

Moreover, high oil prices are putting downward pressure on already weakened currencies of most countries in the region. Over the past several months, most Asian currencies, especially those of Thailand and the Philippine, have experienced continued decline against the greenback due largely to economic and political issues in respective countries as well as a surge in the dollar on strong U.S. productivity High oil prices have put them in a more weaker position.

Last Monday, the Philippine central bank, which had kept saying it would keep the interest rate unchanged, was force to raise the overnight borrowing rate from 10 percent to 11 percent and the lending rate from 12.5 percent to 13.5 percent to stem the straight fall in the peso. Last Wednesday, the peso was quoted at a 32-month-low of 45.69 pesos against a dollar. The peso has depreciated 11 percent this year.

In addition, rising oil prices has raised the production costs of enterprises, export-oriented ones in particular. Exports have long been the main driving force of economic growth in East and Southeast Asian countries. The depreciation of many local currencies has already increased enterprises' costs of importing raw materials and parts and bit into their profits. High oil prices have added to their production costs, doing harm to much-needed corporate reforms.

Merrill Lynch in Hong Kong forecast that if oil prices remain at 33 dollars per barrel next year, the regional economic growth could drop by 0.5 percentage point, and the impact would be more severe in some economies. It said growth in China's Taiwan, South Korea, Thailand and the Philippine would be trimmed by a range of 1 to 1.2 percentage points in 2001.

Overall, the recovery of Asian economy is not in immediate danger, but it needs a closer watch.



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