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[ 2015-01-14 ]

Limited gain from cheap oil

Thailand will be among developing economies in the Asia-Pacific that stand to benefit the most from the drop in the price of oil, but the gain could be eliminated if the United States starts to raise interest rates this year, according to a new report.

In the "Economic and Social Survey of Asia and the Pacific 2014: Year-end Update" by the United Nations Economic and Social Commission for Asia and the Pacific (Escap), it is estimated that if oil prices were to fall by a further US$10 per barrel this year, Thailand would reap the greatest benefit.

Along with South Korea, the Philippines and Singapore, which are all net oil importers, Thailand could see an increase in its GDP growth of up to 0.5 percentage point. 

The Kingdom would experience the highest increase in current-account balance, at 2.2 per cent of gross domestic product. 

Meanwhile, along with China |and the Philippines, it would |experience the largest decrease in inflationary pressure, at 0.5-0.6 |percentage point, Escap said.

Key oil-price benchmarks ended 2014 at a five-and-a-half-year low. Brent settled down at $55.33 as the year ended, while both US and Dubai crude fell - to $53.27 and $55 respectively. 

Oil prices continued their slide towards six-year lows in Asian trade yesterday, after Brent crude closed below $50 a barrel the previous day for the first time since April 2009. 

Escap estimates that Thailand's GDP will expand by 3.9 per cent this year, thanks to some stability and a low base of 0.8 per cent last year. The cheap-oil benefit may push the baseline growth rate to 4.4 per cent. 

In the report, the UN agency noted that the outlook for growth in Thailand was now somewhat more positive than in recent years, although longer-term sustainability of performance would be based on the evolution of politics and economic policy. 

The assumption of power by a military government in mid-2014 has increased consumer and investor confidence in the short term, as it has brought a halt to an extended period of political instability, it said. 

"However, it is also due to the base effect of very low growth in 2014. The stated aim of the government is to move towards a return to democracy. However, uncertainty during this process has the potential to exert renewed pressure on consumer and investor confidence in coming months," Escap said.

Interest-rate effect

One of the external challenges for the Asia-Pacific region is a US interest-rate increase, which is expected to take place in the second or third quarter, it added.

Escap's analysis shows that a 1-percentage-point increase in domestic short-term interest rates in response to an increase in the US rate could cut the baseline growth rate of developing countries in the Asia-Pacific region by 0.3-0.7 percentage point. 

Asia-Pacific economies that are most sensitive to higher borrowing rates are Hong Kong, South Korea and Singapore, where the growth impact is estimated at 0.6-0.7 percentage point. Annual fixed investment growth in these economies could be up to 1-1.1 percentage points lower than the baseline. 

The estimated growth effect on mainland China and Thailand is also sizeable, at 0.4-0.5 percentage point.

An economy's sensitivity to interest-rate change is positively correlated with its size of domestic credit, Escap said, adding that in all five of these economies, domestic credit amounts to at least 110 per cent of GDP. 

Fairly high levels of credit have been directed to certain sectors in these economies, such as to the household sector in South Korea and Thailand, and to the government sector in China.

At 3.9 per cent, Thailand's baseline-growth forecast is the third-lowest among Southeast Asian economies, higher only than 2.5 per cent in Brunei and 3.1 per cent in Singapore.

The report also envisages a year of turbulence due to US monetary-policy normalisation. 

It is estimated that total global liquidity will increase in 2015 by 1.3 per cent of global GDP, as compared with 0.3 per cent last year. 

New funds released through easing by Japan and in the euro zone have the potential to serve to some degree as a buffer to outflows from the region, but the new funds could also go primarily to other markets, such as the US, as has been seen recently with money exiting the region, Escap said in its report.

In short, the entire Asia-Pacific region needs short-term policies to deal with volatility, and long-term ones to take full benefit from cheap oil - such as investing more in infrastructure projects, said the agency.