Tuesday, August 30, 2005

Asia's Big Three Take Oil's Heat

Indonesia Seems Vulnerable But Optimism Is PrevalentOn Japan, China and India


SINGAPORE -- Soaring oil prices could deal a blow to some Asian economies such as Indonesia, Thailand and the Philippines, but the region's biggest economies -- Japan, China and India -- should remain strong, analysts said.

The price of U.S. crude-oil futures had surged above a record $70 a barrel yesterday, as Hurricane Katrina approached New Orleans and threatened to shut for an extended period oil- and gas-producing areas in the Gulf of Mexico and Louisiana refining systems.

Stock markets weakened yesterday in Asia, the U.S. dollar initially sagged before rebounding, and bond prices rose as investors sought a haven from the surge in oil prices.

The specter of a further rise in the cost of oil instilled some caution among economists over Asia's healthy outlook. But many said it is too early to sound an alarm for the region's major economies.

"Oil, rising short-term U.S. rates and slower growth will expose fragilities in emerging markets," said Tim Condon, ING's head of research and chief economist for Asia, in a research report. "In Asia, the weakest links are the Philippines and Indonesia."

Time Is of the Essence

The question is, how long will oil prices sustain their current levels?

"If [the high oil prices are] just weather-related, the [economic] impact will be temporary rather than permanent," said Song Seng Wun, regional economist at GK Goh Research.

Mr. Song warned that Asia's economic outlook could get "interesting" if oil prices rose further and were sustained at a nominal level of $80 a barrel.

Ahead of the latest oil-price surge, economists were mostly upbeat about Asia's prospects for the rest of the year and expected a pickup in growth in the second half after a slow start.

Lehman Brothers, in a weekly report, said it forecast Asia ex-Japan growth at 6.4% in 2005 and at 6.8% in 2006. It also projects the consumer-price index for Asia ex-Japan at 2.8% this year and at 3.1% next year.

Most regional currencies tumbled following the latest oil-price jump. The Singapore dollar slipped to a new one-month low of S$1.6787 against the U.S. dollar, while the Taiwan dollar plunged to a fresh eight-month low of NT$32.473. The yen also was weaker.

In morning New York trading, the dollar was quoted at 110.54 yen, up from 110.20 yen late Friday. Asian equity markets got hammered across the board, especially in South Korea, where the Korea Composite Stock Price Index dropped 2.2%, or 23.39 points, to 1063.16.

The Weighted Price Index of the Taiwan Stock Exchange fell 87.11 points, or 1.4%, to 6049.4 -- its lowest settlement level since finishing at 6039.48 on June 2. Tokyo's benchmark Nikkei 225 Stock Average fell 1%, or 129.65 points, to 12309.83, while Hong Kong's Hang Seng Index fell 145.92 points, or 0.97%, to 14,836.97, after trading between 14,734.43 and 14,861.48. (Articles on pages M2 and M6.)

Jakarta's Jitters

While most Asian economies have coped with persistently high oil prices, Indonesia is most vulnerable as it struggles to adjust to its recently acquired status as a net oil importer and faces a speculative attack on its currency, the rupiah.

Yesterday, Indonesian share prices tumbled to their lowest level since late December 2004 in what traders said was panic selling amid the rupiah's continued losses. The Jakarta Stock Exchange's main index ended down 5.2%, or 54.104 points, to 994.77. Volume was heavy with 3.1 billion shares changing hands, valued at 2.31 trillion rupiah ($222.4 million), compared with 1.4 billion, valued at 1.2 trillion rupiah Friday. (Related article on page M2.)

Indonesia is the sole Southeast Asian member of the Organization of Petroleum Exporting Countries, but slackening investment in oil exploration and extraction has reduced the country's crude output.

Indonesian President Susilo Bambang Yudhoyono on Sunday called for greater domestic oil and gas production to help Indonesia battle rising global oil prices, which are threatening the nation's economic recovery.

Fuel subsidies aimed at protecting poor Indonesians from high prices have risen along with oil prices, putting pressure on the government's budget. Last year, it spent around $7.4 billion, or 3% of gross domestic product, on subsidies.

The rupiah hit a 3½-year low against the dollar yesterday, in part due to high demand for dollars by state-owned Pertamina oil company to fund oil imports. The rupiah traded late at 10,840 to the dollar, down from 10,400 rupiah Friday and equal to the close Nov. 6, 2001.
To a lesser extent, Thailand is sensitive to elevated oil prices because of its high inflation, though the government should be able to mitigate the potential negative impact on the economy, said GK Goh's Mr. Song.

Bank of Thailand Governor Pridiyathorn Devakula said Monday that he isn't worried about global oil prices at historic highs as the climb is likely be temporary.

In Malaysia, the government is rethinking its policy of oil subsidies in light of high global oil prices, and may cut the subsidies, according to Deputy Finance Minister Ng Yen Yen, although Malaysia's economy is relatively strong.

With refineries and rigs disrupted, oil inventory problems in the U.S. could worsen. Energy analysts now see the possibility of oil at $80 a barrel and natural gas at $15 per million British thermal unit in the wake of Katrina, a jump that could hurt the U.S. economy, and by extension, the economies in Asia that export to the U.S.


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