Opec deal comes at awkward moment for Asian economies

Opec’s first agreement to cut oil production in eight years is the latest headwind for Asia, where the world’s fastest-growing economies are already feeling the strain of weaker exports, falling currencies and bracing for rising US borrowing costs.Higher energy costs – if sustained – will stoke inflation in some of the region’s economies and weigh on household spending at the same time a strengthening greenback pushes up import costs. While some Asian central banks may welcome the leg-up in their battle against disinflation, the combination of a rising dollar and firming price pressure may leave others with little room to lower interest rates in the event their economies falter.“Already roiled by anaemic growth and wobbly finances, a spike in oil prices is thus the last thing Asian economies need right now,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings in Hong Kong.Benchmark oil prices gained as much as 10% in New York after the Organisation of Petroleum Exporting Countries reached agreement to drain record global inventories.Oil and gas exporting nations Malaysia, Brunei and Myanmar may get a boost from rising oil prices. Malaysia is the only net exporter of oil among Asia’s major economies and derives about a fifth of government revenue from energy-related sources.“From a current account, growth, and government revenue perspective, Malaysia is the biggest winner of this as it gives the economy some respite,” said Trinh Nguyen, an economist at Natixis in Hong Kong. “It is the worst hurt this year thus far by low oil prices.”Singapore could also benefit given its role as a commodities trading hub that’s home to oil-related services companies. Vietnam, another oil producer, could get a budget boost from increased revenues.For oil importing Japan, Opec’s move is actually a potential positive for a central bank that’s desperate to slay deflation once and for all. The Bank of Japan forecast inflation of 1.7% in the fiscal year starting April 2018, based on the assumption that oil prices will rise to about $55-$60 a barrel near the end of that year, the bank said last month.“This is kind of good news for Japan in particular,” Paul Sheard, chief economist at S&P Global in New York, told Bloomberg News.India tops the worry list. The big slump in oil prices that began in 2014 helped narrow the nation’s current account deficit, something that could reverse if crude rallies. India’s $2tn economy imports more than 80% of its crude requirement and the International Energy Agency expects it to be the fastest-growing consumer through 2040. Opec’s move also comes as the economy reels from Prime Minister Narendra Modi’s move to invalidate almost all cash in circulation. If oil induced inflation takes off, it could make it harder for the Reserve Bank of India to lower interest rates.“The biggest loser is India as a weaker rupee and higher oil prices will drive import costs higher. This will cause the current account deficit to worsen in 2017,” said Nguyen at Natixis.China, South Korea and Thailand are among those who may also take a hit, though analysts say the impact should be manageable. Inflation in all three countries is low and China stocked up on oil reserves when prices were depressed. Still, weakening currencies will push up import prices, meaning inflation could become a concern sooner than many thought just a couple of months ago.“The impact on China, which is a net commodities importer, will be quite muted in the short-term, as China secured a good supply of commodities and has been increasing its inventories,” said Karine Hirn, a partner at East Capital in Hong Kong, an emerging markets fund manager that oversees about $3bn.Indonesia, as a net oil importer, won’t benefit because it will increase prices, Energy and Mineral Resources Ignasius Jonan said in a statement. But it’s early days, and a lot will depend on whether the Opec production cut proves effective and where prices settle longer term.“There is a danger in getting too excited,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “Around $50 a barrel is where the median shale oil producer is economic and so shale production will start to ramp up again and it’s questionable whether Opec discipline will really hold, so I am sceptical that the oil price will go too high. Maybe $55 or $60 tops.”