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Asian Economies Vulnerable to Oil Price Increases, say Analysts - 2003-02-04

War talk has unsettled trading in Asian stock markets for months now. As the United Nations Security Council deliberates its next move on Iraq, economists in Asia warn that a conflict could weaken the region's economies, some of which are just coming out of recession. Iraq may be thousands of kilometers away from east Asia but economists in the region are saying a U.S.-led attack against Baghdad, if drawn out, could spell trouble.

Their main concern is a prolonged period of high oil prices.

Craig Chan, a Singapore-based economist at independent research firm 4-Cast International, explains how high oil prices can hurt Asian economies and eat into their gross domestic product figures. "We are talking about a rough loss of about 1.5 percent for economies such as China, Hong Kong, Korea, the Philippines and Thailand if oil was at $50 per barrel. Also we have the indirect impact on consumption and investment if the U.S. economy and financial markets were to deteriorate," Mr. Chan said.

Japan imports around 80 percent of its energy and if oil prices go up, consumer sentiment suffers. Given already sluggish domestic demand, Mr. Chan says Japan could face severe trouble.

"The last thing that Japan needs is another shock to the external sector given that domestic demand is still extremely weak. We are going to see even more pressure on the fiscal deficit side," he explained.

In Southeast Asia, a spike in oil prices may in fact benefit oil producer Indonesia. But while a short term increase in oil revenues could help the cash-strapped government, analysts caution that Indonesian consumers could be hit by higher prices for basic goods.

Indonesia's government is facing a huge deficit and recently had to back down on plans to cut subsidies for fuel, and telephone and electricity rates.

Some analysts are also worried about a backlash from Indonesia's overwhelming Muslim majority the event of war.

But Merrill Lynch Indonesia's chief researcher Heriyanto Irawan says the economic and social fall-out from war should be minimal. "If we assume that this is a well-contained attack on Iraq then I think the impact as far as Indonesian is concerned will not be widespread. If what is required of the Indonesian government [in the war] is just moral support rather than real action [an active role], then I still believe the political ramifications from that should not get out of hand," Mr. Irawan said.

In the Philippines, war with Iraq would mean that thousands of Philippine workers based in the Gulf would be forced to evacuate. This would translate into millions of lost dollars in foreign exchange, one of the keystones of the Philippine economy.

In the last week of January, the talk of war pushed Asian currencies up against the dollar. That means Asian exports are becoming more expensive in the United States, and this could hurt exporters' profits in the long run.

Economists say that if the U.S. dollar stays weak, small export-driven economies like Singapore's, which recovered from recession only last year will be vulnerable. The United States is Singapore's biggest trading partner.

Pamela Wong, an economist at research firm MMS International in Singapore, says the city-state would have to find ways to compensate for the fall in export demand. "If external demand is going to be affected, the small domestic demand is unlikely to be able to fill a vacuum," Ms. Wong said.

Ms. Wong adds that in Southeast Asia, Malaysia and Thailand can better withstand shocks from a conflict because of stable domestic consumption. Thailand is enjoying a surge in economic growth not seen since the Asian financial crisis overwhelmed it five years ago.