Win-win scene for Asia economies

Experts say lower oil prices would ease inflationary pressures throughout much of Asia.

By (AFP)

Published: Fri 9 Jan 2015, 1:12 AM

Last updated: Thu 25 Jun 2015, 7:52 PM

A petro-industrial factory in Kawasaki near Tokyo. There has been a slowdown in demand in Japan, a key crude export market. — Reuters

Singapore — The plunge in crude prices will give a much-needed boost to Asia’s oil-guzzling economies and provides governments a “golden opportunity” to implement crucial structural reforms such as cutting expensive energy subsidies, analysts say.

A slowdown in the key export markets of Europe, China and Japan, the end of US stimulus measures and an expected US rate hike — fuelling a flight of foreign cash in search of better returns — has left some governments having to make tough decisions to get back on track.

But experts say lower oil prices would ease inflationary pressures throughout much of Asia, allowing many central banks to either keep monetary policy on hold or reduce interest rates. And the Asian Development Bank (ADB) last month said developing countries could see an additional 0.5 percentage point of growth on average this year if oil prices remain low.

However reforms are needed, analysts say, and among the most crucial and controversial is the removal of fuel subsidies, which in the past been the catalysts for sometimes violent protests across the spectrum.

While global equity markets are being strafed by a continuing slump in the prices of black gold, analysts said countries should grab the opportunity and move now. Malaysia, Indonesia and India have already made cuts to the populist but economically disastrous subsidies, which have contributed to government fiscal deficits.

Shang-Jin Wei, chief economist at the Manila-based ADB, said in a statement that easing oil prices “present a golden opportunity” for oil-importing countries to introduce reforms.

And Rajiv Biswas, Asia Pacific chief economist at global consultancy IHS, warned if they fail to move, leaders “will miss the window of opportunity and face public resistance to removal of fuel subsidies if oil prices strengthen significantly in future years”.

Previous efforts in Indonesia to slash fuel subsidies sparked violent protests, but the country’s new president Joko Widodo has vowed to tackle the problem despite risks to his popularity.

Widodo wants the money diverted to overhauling infrastructure and helping the country’s poorest. India experienced protests in the past when it tried to cut the subsidies — diverted government funds used to artificially keep fuel prices low.

Removing the payouts allows market forces to determine prices and free them from political manipulation. The softer crude prices will also provide some respite for the region’s oil-reliant economies, facing global headwinds from slowing in their key export markets.

Biswas said “most of the Asian economies are large net importers of oil and gas, and will benefit from lower oil import costs and significantly reduced fuel costs for consumers”. “This positive boost helps to mitigate the negative effects of China’s moderating growth rate and Japan’s slump back into recession in late 2014,” he said.