ADB says high oil prices a ‘manageable risk’ for Asia

Sharp increases in oil prices in recent months pose a risk, although a manageable one, for Asian economies as long as governments use the right policies, the Asian Development Bank (ADB) said yesterday.

"Asia remains particularly vulnerable to an oil shock because of its high dependence on oil imports," said the report by ADB economist Park Cyn-Young.

Asia produces 10 percent of world crude supply but consumes 24 percent, with consumption in China and India rising, adding to the pressure on prices.

Asia’s increased appetite for oil "is not a temporary phenomenon," it said.

It said gross domestic product (GDP) of 10 Asian nations including Japan, China and India, would suffer a 0.1 percentage point reduction in 2004 and a 0.5-0.6 percentage point reduction in 2005 if oil prices remain at about $40 a barrel.

Inflation would also be higher in many of these countries particularly India, Indonesia, Malaysia, the Philippines, Singapore and Thailand.

However, the impact of higher oil prices would not match those of previous shocks since the world economy had become more resilient to such fluctuations since 1973, it added.

Other developments could also help lessen the impact in Asia, the ADB said, citing the weakening of the dollar against many Asian currencies, higher levels of international reserves and current account surpluses, and lower inflation in many countries.

"Asia’s current economic background remains favorable compared with previous oil shocks, making risks from an oil price increase manageable," the report said.

"Government policies can help mitigate the adverse impact on the economy," although such policies would differ from country to country.

Monetary authorities should remain on guard for signs of inflation, it said.

Countries with "managed floats" of their currencies could "allow for more flexibility," while those with currency pegs should allow for more "market-oriented reforms towards more flexible goods and labor markets" to cope with the higher oil prices.

Asian nations which are shifting from export- to consumption-led growth should also push through structural reforms to boost their investment climates by improving competitiveness, productivity and corporate governance.

Rising oil prices could even be a "blessing in disguise" if Asian nations implement policies that would increase energy efficiency while lowering oil consumption, it added.

The ADB study advocates structural reforms to foster the investment climate through improving competitiveness, productivity, and corporate governance for sustainable recovery and growth, as well as the adoption of a more efficient energy policy.

"The current oil price rally may even turn out a blessing in disguise, if the Asian economies successfully embrace necessary technological challenges and find more efficient ways to generate and save energy," the report said.

Today’s increasing oil prices are threatening the growth of Asian economies, which are highly dependent on oil imports. While Asia produces a mere 10 percent of the world crude oil supply, the region consumes almost a quarter of the world’s supply.

The Philippines is a net importer of crude and finished petroleum products despite the much ballyhooed natural gas and geothermal sources locally.

Thirty-percent of the country’s power supply is still run by petroleum products while manufacturing and vehicular demands are even bigger.