Low oil prices continue to benefit Asian emerging markets

(MENAFN- Arab News) KUWAIT: Even after the pickup in prices since the beginning of the year partially offset by last month's developments oil price levels continue to bode well for Asian emerging markets' gross domestic product (GDP) growth with the exception of Malaysia. The deflationary pressures from lower oil prices give more room for central banks to loosen their monetary stance further helping to boost growth.
With that the risk of a hike in the US still poses a threat since diverging monetary policies between Asian countries and the US have been precursor to the 1997 crisis. But more flexible currency regimes adopted since 1997 and lower debt levels leave Asian countries better shielded from a repeat of the crisis. Oil prices are expected to remain volatile but are not expected to increase significantly during the rest of the year.
Asiya Investments' economic paper titled "The effects of oil prices on emerging Asian countries" revealed that the low price of oil will have a positive impact on real output in Asia's emerging markets with the exception of Malaysia which is an exporter of oil. Those economies that are net importers of oil Thailand China and South Korea will benefit from cheaper oil through lower import bills improved fiscal positions due to lower fuel subsidies and lower input and transportation costs all of which will stimulate growth. Meanwhile as oil exports account for nearly 30 percent of the Malaysian government's revenues cheaper oil is expected to negatively impact Malaysian GDP growth.
'The positive impact on real output is estimated to be highest for Thailand China and South Korea with real output estimated to increase by 2.9 percent 2.6 percent and 2.4 percent respectively. As net importers of oil cheaper oil will benefit these countries through lower import bills and allows them to improve their fiscal positions by cutting down on costly fuel subsidies. Lower fuel expenditure by consumers and lower input costs and transportation costs for businesses will also further stimulate growth' said Ahmad Al-Nafisi Economist at Asiya Investments and the lead author of the report.
Lower fuel prices and in turn lower input costs may have increased purchasing power in these economies but have also resulted in a disinflationary pressure although it is not expected to last for long given that oil prices are expected to stabilize in the second half of 2015.
Francisco Quintana Head of Research at Asiya Investments said: 'We don't think deflation will be a problem in these countries because in the second part of the year the energy component of CPI will start to become positive'.
The positive impact of cheaper oil on Asian emerging markets however could be offset by weaker global economic growth which has been revised downward by the International Monetary Fund (IMF) to 3.5 percent from 3.8 percent it forecasted in October 2014. A slowing Chinese economy stagnant growth in the euro zone and Japan and a looming recession for Russia will drag on global growth and the effect will likely outweigh the benefits of cheaper oil on the global economy with those markets reliant on exports to China most likely to be impacted. Meanwhile as the US economy has recorded strong performance throughout 2014 the US dollar has been strengthening while most Asian currencies have been depreciating against it.
A tightening in US monetary policy and a stronger dollar were key precursors of the 1997 Asian financial crisis which was heightened by the currency peg to the US dollar a large external debt and small foreign exchange reserves. To avoid a repeat of 1997 Asian countries have adopted more flexible exchange rates since the crisis and now boast larger foreign exchange reserves which protect them from severe currency devaluations. Also protecting Asian emerging markets from financial collapse is the existence of a current account surplus which has been bolstered by savings made on import bills due to lower oil prices.
These factors in addition to the expectation of a hike in US interest rates has already been factored into Asian markets leaving them in a better position to withstand capital outflows today than they had been in the 1990s.
On the supply side OPEC has not cut its production level since December and has not indicated any intention of doing so in the foreseeable future. An upcoming nuclear deal that will lift sanctions from Iran will also further exacerbate the supply glut as Iran increases its own oil exports. US crude oil stockpiles (excluding Strategic Petroleum Reserves) have been growing since the price of oil began to decline and now stand at an 80-year high. On the demand side slowing growth in China and in the OECD region will also curb further increases in the price of oil.
Quintana concluded: 'Overall oil supplies are growing and global demand is weakening. This will drive oil prices to stay lower for longer in order to clear the oversupply in oil. The disinflationary pressure from lower oil prices will enable Asian central banks to continue loosening monetary policy or to stay at current levels throughout the year as leading indicators point to a further slowdown in China and inflation in most countries in the region is well below target levels.'