[HONG KONG] The rally in oil prices is a potential game changer for inflation in Asia and will pressure central banks to lift interest rates after years of easy money.
With the region's economic growth already enjoying the tailwinds of an export boom, the ingredients for a pick-up in inflation are falling into place.
Food costs can rise in response to higher oil prices, with implications for policy makers in emerging Asia, where the combined weight of food and energy in inflation gauges averages 38 per cent, and is around 50 per cent or higher in several markets, according to analysts at Nomura Holdings Inc.
"The implication is that the recent sharp rise in oil prices, if sustained, could be the spark that ultimately impels EM central banks to raise policy rates faster than they would otherwise," the Nomura analysts wrote in a note.
The impact of sustained higher oil prices will vary from country to country. Oil exporters such as Malaysia stand to benefit. Ship-building South Korea could gain if higher oil prices trigger a pick-up in orders from the Middle East. Taiwan, with a current account surplus of almost 13 per cent of national output, is well-placed to handle any price surge, while Thailand will be cushioned by bumper tourism and electronics exports.
At the same time, an inflation up-tick will boost nominal growth and will be welcomed in a region awash with debt. Record levels of international reserves will allow policy makers alternative tools to raising borrowing costs. To be sure, the rally in oil prices may prove to be temporary.
Here's a look at how rising oil prices may impact the world's fastest-growing region.
- China: The world's second-biggest economy and biggest buyer of oil is vulnerable to higher prices, which would pressure the current account surplus, push up factory prices, shave corporate profits and ultimately impact growth. Core inflation is already at a six-year high. A silver lining is that oil makes up only a small part of the CPI basket, according to Nomura, so the impact on inflation may be limited.
- Japan: Bank of Japan Governor Haruhiko Kuroda blamed the collapse in oil prices for hampering his early efforts to stoke inflation. But energy prices accounted for a majority of the 0.7 per cent gain in Japan's core inflation gauge in September. While higher oil prices would help push inflation closer to the BOJ's 2 per cent target, they would also sting. Japan imports almost all of its oil so rising costs could damage household purchasing power at a time when wage gains are just starting to pick up. Prices for Japan's regular gasoline rose this month to the highest level since August 2015.
- India: Oil at US$65 a barrel could add 30 basis points to annual inflation and a key measure of growth may weaken by 15 basis points, the Reserve Bank of India estimates. Annual inflation is forecast to reach 4.2 per cent to 4.6 per cent in the second half of the fiscal year ending March 31, above the 4 per cent medium-term target. Annual inflation accelerated to 3.6 per cent in October. India imports more than 80 per cent of its oil requirements, and according to the Petroleum Planning and Analysis Cell, an increase of US$10 a barrel would see the current account deficit widen by US$8 billion, or 0.3 per cent of GDP.
- Australia: Mineral-rich Australia traditionally takes a hit from rising oil prices as motorists feel the pain at gas stations, almost like a tax increase. But with a series of major liquefied natural gas projects coming on stream, the impact may not be quite as clear this time, due to the link between LNG and oil prices.
- Indonesia: Even though it is an oil producer, the archipelago is also a net oil importer. That leaves it vulnerable to importing inflation. Analysts say the central bank's easing cycle is over and its next move could be a rate hike. As an exporter of liquefied natural gas, it has some cushion.
- Philippines: The South-east Asia nation relies on imported oil. That means higher prices will pressure an already weakening current account position and accelerate inflation in quick time. The central bank is already tipped by some economists to tighten in 2018. With inflation hovering at 3.5 per cent, within a target range of 2 per cent to 4 per cent, the rate hike could come sooner than expected.
- Malaysia: A net exporter of oil and LNG, Malaysia stands to benefit from a fiscal boost if oil prices hold up. The flip side is that it would also raise inflation. Nomura estimates CPI will gain 0.8 percentage points on a US$10 rise in oil. The central bank has already surprised by shifting to a hawkish stance.
- South Korea: Consumption and company profits could take a hit but the ship-building nation could benefit if orders pick up from energy companies. The central bank has already signalled borrowing costs are going higher.