Optimism grows on coping with oil price hikes , Indonesia is better placed to survive

Brighter growth prospects for Asia over the next 12 months have raised hopes that regional economies will cope should oil prices again breach US$70 (HK$546) a barrel.

Brighter growth prospects for Asia over the next 12 months have raised hopes that regional economies will cope should oil prices again breach US$70 (HK$546) a barrel.

Analysts widely see that level as probable within the next two months. Oil currently hovers a few dollars shy of the record high of US$70.85 reached in August following Hurricane Katrina in the United States.

US$70 was once thought of as a potential breaking point for regional economies with heavy reliance on oil imports. The lesser impact now envisaged marks a welcome change from the pessimism that dominated the markets just five months ago.

"Seventy dollars appears likely but global growth seems solid right now," said David Cohen, a regional economist with Singapore-based Action Economics.

"The data from across the region shows that the Asian economies finished 2005 on a solid note supported by strength in global export demand. That looks likely to continue into the first half of 2006."

Middle East tensions, consumer demand and institutions which increasingly see oil as an investment risk pushing the cost of crude to beyond US$90 a barrel, according to some analysts. BT Pension Scheme plans to invest 1 billion (HK$13.6 billion) in the commodities market.

"This is a huge amount of money in the commodities market," said Tetsu Emori, chief commodities strategist with Mitsui Bussan Futures in Tokyo. "Oil prices would be pushed up by this kind of pension fund money. It's a big one we cannot ignore."

That prospect, plus possible sanctions against Iran and unparalleled growth in markets like China and India, has Emori forecasting oil prices of US$90-US$97 in the second half of this year. At those levels, analysts expect inflation to rise, coercing central banks into another round of interest rate hikes, and global economic growth to falter.

However, even at US$90 to US$100 a barrel, Cohen is optimistic the region would weather the economic fallout, if spiraling oil prices are driven more by demand than political risk factors.

"The increase last year reflected a strength in global demand rather than a supply shock - if that continues to hold through this year, then the higher prices should not derail the growth in the region," he said.

"It would subtract some percentage points from world growth but, again, the distinction between higher prices resulting from geopolitical shocks as opposed to resulting from growth in global demand should be made," he said.

Australian growth has been clipped by oil. But Commsec commodities strategist David Thurtell said the outlook remained solid amid surging commodity prices and a stable housing market. "I don't think people are hurting too much," he said.

Indonesia is better placed to survive another shock after substantially reducing expensive fuel subsidies.

Standard Chartered Bank economist Fauzi Ichsan said recent fuel price hikes had caused a fall in demand. Inflation is now expected to ease but a target of 6 percent growth in 2006 is being maintained.

"For 2006, the impact of oil prices is not too big," he said. "Indonesia's balance of payments is improving."

Australia and Indonesia are big energy producers but India, China and Japan are major importers and are more acutely affected by pricing.

"Oil prices are high but they are showing signs of relative stability," said Masaaki Kanno, chief economist at JPMorgan Securities Asia. After a decade in the economic doldrums and painful corporate restructuring, Japanese businesses are returning handsome profits and Kanno insists oil costs will have minimal impact because "the European economy is still vibrant and the US economy is still hanging in there."

Victor Shum, an analyst with Purvin and Gertz, expects oil prices to soar beyond previous record levels, but he believes China will maintain its subsidized pricing regime. "Overriding priority to maintain social stability and control inflation, one can expect oil prices, or domestic refined oil products, to be capped artificially low," he said.

This would ensure Chinese pump prices remain "disconnected from international prices."

However, analysts say India is more vulnerable, with oil the biggest contributor to inflation.

Analyst Paranjoy Guha Thakurta said Indian oil consumption was keeping pace with growth of 7 percent to 8 percent. Had prices held steady last year then inflation would have been 2 percentage points lower.

"For 2006, I am not very optimistic as international demand and supply are very finely balanced," he said.

Source:
The Standard, China's Business Newspaper
February 07, 2006