What If Oil Prices Reach $200?

Key points

-We analyze the hypothetical scenario of oil prices reaching $200/barrel by year end.

-This would push shares of oil expenditure in nominal GDP to above peak levels of 1980 for most Asian economies. And Asian growth could be cut by at least another 1.5ppts.

-Growth of economies with high energy-intensity, such as Indonesia, Malaysia, Thailand and Taiwan, would be affected more, while Chinese and Indian growth might be shielded by oil subsidy.

-Average inflation rate could rise by another 3.5ppts, defying the notion that supply-driven inflation could go away by itself. Rates would move up much more rapidly across the region.

-Current accounts would probably worsen in most Asian economies, posing particular challenges for India, Korea, the Philippines, Taiwan and Thailand, and their currencies.

-Indonesia and Malaysia already indicated imminent fuel price adjustments, while India would probably find high fuel subsidy hard to swallow given its already massive fiscal deficits.

Asian central banks’ dilemma
Policymakers continue to face the growth-and-inflatio n dilemma in Asia: while
economic activities showed more evidences of moderation, inflation rates climbed higher in recent months.

Most central banks are torn between the need to tighten to fight inflation and the urge to ease to limit growth slowdown.

According to latest monthly economic data, the pace of industrial production eased in China, India, Korea, Malaysia, Taiwan and Vietnam, while growth of exports moderated in China, Malaysia, the Philippines, Singapore, Taiwan and Vietnam .

So far the slowdown has been modest in magnitude in general, but the
trend may be worrisome for the authorities, especially as the US economy continues to weaken.

In China, for instance, export growth lowered to 21.8% in April from
30.6% in March, while production growth edged down to 15.7% from 17.8% during the same period.

Rising inflation was even more uniform in the region, evidenced recent data from China, India, Indonesia, Korea, Malaysia, the Philippines, Thailand and Vietnam. China’s CPI rebounded to 8.5% in April from 8.3% in March and Vietnam’s CPI further escalated to 21.4% from 19.4% during the same period. In all these economies except Thailand and Malaysia, the actual inflation rates are already way above the official targets.

Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.
Source citygroup research