(Reuters) - Rising risks of deflation in major economies have renewed worries about global growth, but sliding prices for oil and other commodities should boost most of Southeast Asia.
In much of the region, "consumers are going to feel a lot richer," said economist Gareth Leather at Capital Economics.
"The benefits to growth are quite significant." Since June, the price of a barrel of Brent crude has dropped by 25 percent to $86, which means big savings for Southeast Asia's large oil-importing economies - Thailand, Philippines and Indonesia - though pain for net exporter Malaysia.
Anthony Jude, senior adviser to the Asian Development Bank's energy section, said lower oil prices also give some countries "an opportunity to remove subsidies".
For Thailand, whose economy has floundered for a year due to political turmoil and faltering exports, cheaper oil could mean faster growth. Its annual growth rate will rise 0.45 percentage points for every 10 percent fall in oil prices, according to Bank of America Merrill Lynch.
For Indonesia - Southeast Asia's largest economy - cheap oil means the new president could rid the country of crippling energy subsidies relatively painlessly.
Elsewhere, central banks may be able to keep interest rates down for longer, although these will need to rise when the Federal Reserve starts hiking U.S. levels, which many expect by mid-2015.
In addition to oil, there have been falls in global prices of some foodstuffs Southeast Asia imports such as wheat and soybeans, used to make tofu.
Where governments don't stand in the way of falling prices, cheaper food and fuel should leave consumers with more disposable income.
This, in turn, should stimulate domestic consumption - which is pivotal when demand in large export markets such as Europe and Japan is stagnant, and worries persist about China - a big importer of Southeast Asia's rubber, palm oil and other commodities.
Typically, food and energy have heavy weightings in Southeast Asian consumer-price indices, so lower prices have a big impact on headline inflation.
The Philippines, one of the region's fastest-growing economies, raised its benchmark interest rate in July and September to dampen price pressures. But on Oct. 23, the central bank left rates on hold and pared its inflation forecasts, citing "easing pressures on commodity prices".
TIME FOR BOLD ACTION?
Many Southeast Asian nations subsidize fuel prices. When governments don't pass on lower global prices to consumers, subsidies become less costly. Indonesia's government, which spends around 3 percent of GDP on energy subsidies, should be able to spend savings on improving the archipelago's dilapidated infrastructure.
President Joko Widodo has pledged stiff rises to gasoline and diesel prices. Some economists say now is the time to scrap subsidies altogether, as doing so when the gap between subsidized and market prices is small would be less painful for consumers.
An increase of just 3,000 rupiah ($0.25) in the price of a liter of gasoline and diesel would "more or less eliminate retail fuel subsidies overnight," said Daniel Wilson, an economist at ANZ bank.
Abolishing subsidies would have multiple benefits, including cutting Indonesia's current account deficit, which makes it especially vulnerable to capital flight when U.S. interest rates rise, and ending price distortions that discourage private sector investment in the domestic energy industry.
Thailand, where the army took power in May, also spends a lot on subsidies. It will seek to raise revenue by reinstating an excise duty on diesel without raising prices for consumers, said Santitarn Sathirathai at Credit Suisse. It could use part of the proceeds, equivalent to about 0.8 percent of GDP, to stimulate the economy, he said.
NOT ALL GOOD NEWS
However, the low current oil price isn't good news for all Southeast Asia. Malaysia, as a net oil exporter, sees some loss of income. And because of declining dividends from state oil firm Petronas, Prime Minister Najib Razak's government may have to cut spending to meet its targets to cut the budget deficit.
On Oct. 2, Najib's government raised retail prices for petrol and diesel by about 10 percent as part of a plan to "rationalize" energy subsidies, which equal around 2.5 percent of GDP, and balance the budget by 2020.
For resource-rich Indonesia, weak global commodity prices are cutting earnings from the coal, rubber and palm oil it exports, so its trade balance isn't seeing much improvement. And Indonesia's Widodo may find it harder to sell unpopular fuel-price hikes, much less the scrapping of subsidies, now that pressure on the budget has reduced.
Much of the recent decline in the price of oil is because of more supply, but if deflation were to grip the global economy as a result of slumping demand it would hurt export-led economies such as those in Southeast Asia.
Farmers' incomes would be pinched and debtors would suffer as the size of their borrowings rises in real terms. Thailand, where private debt is high, demand weak and prices falling on a monthly basis, is at greatest risk of this "debt deflation," said Santitarn.
"Lower oil prices would be a positive for the region as a whole," said Leather of Capital Economics. "Thailand and Indonesia stand out as the two countries that have most to gain."
reuters.com
In much of the region, "consumers are going to feel a lot richer," said economist Gareth Leather at Capital Economics.
"The benefits to growth are quite significant." Since June, the price of a barrel of Brent crude has dropped by 25 percent to $86, which means big savings for Southeast Asia's large oil-importing economies - Thailand, Philippines and Indonesia - though pain for net exporter Malaysia.
Anthony Jude, senior adviser to the Asian Development Bank's energy section, said lower oil prices also give some countries "an opportunity to remove subsidies".
For Thailand, whose economy has floundered for a year due to political turmoil and faltering exports, cheaper oil could mean faster growth. Its annual growth rate will rise 0.45 percentage points for every 10 percent fall in oil prices, according to Bank of America Merrill Lynch.
For Indonesia - Southeast Asia's largest economy - cheap oil means the new president could rid the country of crippling energy subsidies relatively painlessly.
Elsewhere, central banks may be able to keep interest rates down for longer, although these will need to rise when the Federal Reserve starts hiking U.S. levels, which many expect by mid-2015.
In addition to oil, there have been falls in global prices of some foodstuffs Southeast Asia imports such as wheat and soybeans, used to make tofu.
Where governments don't stand in the way of falling prices, cheaper food and fuel should leave consumers with more disposable income.
This, in turn, should stimulate domestic consumption - which is pivotal when demand in large export markets such as Europe and Japan is stagnant, and worries persist about China - a big importer of Southeast Asia's rubber, palm oil and other commodities.
Typically, food and energy have heavy weightings in Southeast Asian consumer-price indices, so lower prices have a big impact on headline inflation.
The Philippines, one of the region's fastest-growing economies, raised its benchmark interest rate in July and September to dampen price pressures. But on Oct. 23, the central bank left rates on hold and pared its inflation forecasts, citing "easing pressures on commodity prices".
TIME FOR BOLD ACTION?
Many Southeast Asian nations subsidize fuel prices. When governments don't pass on lower global prices to consumers, subsidies become less costly. Indonesia's government, which spends around 3 percent of GDP on energy subsidies, should be able to spend savings on improving the archipelago's dilapidated infrastructure.
President Joko Widodo has pledged stiff rises to gasoline and diesel prices. Some economists say now is the time to scrap subsidies altogether, as doing so when the gap between subsidized and market prices is small would be less painful for consumers.
An increase of just 3,000 rupiah ($0.25) in the price of a liter of gasoline and diesel would "more or less eliminate retail fuel subsidies overnight," said Daniel Wilson, an economist at ANZ bank.
Abolishing subsidies would have multiple benefits, including cutting Indonesia's current account deficit, which makes it especially vulnerable to capital flight when U.S. interest rates rise, and ending price distortions that discourage private sector investment in the domestic energy industry.
Thailand, where the army took power in May, also spends a lot on subsidies. It will seek to raise revenue by reinstating an excise duty on diesel without raising prices for consumers, said Santitarn Sathirathai at Credit Suisse. It could use part of the proceeds, equivalent to about 0.8 percent of GDP, to stimulate the economy, he said.
NOT ALL GOOD NEWS
However, the low current oil price isn't good news for all Southeast Asia. Malaysia, as a net oil exporter, sees some loss of income. And because of declining dividends from state oil firm Petronas, Prime Minister Najib Razak's government may have to cut spending to meet its targets to cut the budget deficit.
On Oct. 2, Najib's government raised retail prices for petrol and diesel by about 10 percent as part of a plan to "rationalize" energy subsidies, which equal around 2.5 percent of GDP, and balance the budget by 2020.
For resource-rich Indonesia, weak global commodity prices are cutting earnings from the coal, rubber and palm oil it exports, so its trade balance isn't seeing much improvement. And Indonesia's Widodo may find it harder to sell unpopular fuel-price hikes, much less the scrapping of subsidies, now that pressure on the budget has reduced.
Much of the recent decline in the price of oil is because of more supply, but if deflation were to grip the global economy as a result of slumping demand it would hurt export-led economies such as those in Southeast Asia.
Farmers' incomes would be pinched and debtors would suffer as the size of their borrowings rises in real terms. Thailand, where private debt is high, demand weak and prices falling on a monthly basis, is at greatest risk of this "debt deflation," said Santitarn.
"Lower oil prices would be a positive for the region as a whole," said Leather of Capital Economics. "Thailand and Indonesia stand out as the two countries that have most to gain."
reuters.com
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