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Lower Global Oil Prices Boost Asia's Prospects Into 2015

FILE - A worker at a state-owned Pertamina petrol station holds money as a motorcycle is filled with subsidized fuel in Jakarta, Oct. 31, 2014.
FILE - A worker at a state-owned Pertamina petrol station holds money as a motorcycle is filled with subsidized fuel in Jakarta, Oct. 31, 2014.

The recent sharp fall in oil prices has helped boost Asia's economies, enabling governments to ease costly fuel subsidies. Analysts say lower prices also ease payment pressures in oil import dependent economies in the face of expected higher global interest rates in 2015.

Economists said a 25 percent fall in international oil prices since July is lifting Asia's economic prospects because of the region’s heavy dependence on imported fuel to drive growth.

They also said the benefits from lower oil import bills also ease international payment pressures with more money in the pockets of consumers and less price inflation.

The benchmark Brent crude oil has fallen to below $80 a barrel, sharply down from market levels of more than $108 in December 2011. The price of liquefied natural gas (LNG), used widely across Asia, including Japan, is linked to Brent crude.

Andrew Colquhoun, senior director with the Hong Kong-based Fitch Ratings, said regional economies will gain from the windfall.

"Most Asia-Pacific economies are oil importers and therefore the decline in oil prices is equivalent to a kind of income gain for them and the impact depends on whether they save or spend the income gain," he said.

Fitch Ratings, in a recent analyst's report , says most major Asian economies including China, Japan, Korea and Thailand would see an effective overall income boost from sustained lower oil prices. Thailand's oil import bill accounts for 15 per cent of national income, the largest relative cost burden in the region.

Lowering oil prices subsidies

Again a backdrop of lower global prices Indonesia, Malaysia and Thailand all are moving to reduce oil price subsidies, often a major element in government spending.

Earlier this month Indonesian President Joko Widodo raised subsidised fuel prices by over 30 per cent. The politically sensitive move led to criticism by trade unions and opposition parties. But the government says it is providing social assistance to over 15 million people to ease the impact of higher fuel costs.

Gareth Leather, an economist with the London-based Capital Markets, says that for Indonesia while there will be a short term impact, the savings will allow more public spending and boost investor confidence that President Widodo is "serious about economic reform."

"Longer term it is a good move from Indonesia's perspective. First of all its going to free up quite a bit money from the government's perspective. At the moment it spends about 20 per cent of its annual budget in fuel subsidies - which is a huge brace," said Leather.

More money for domestic spending

Indonesia's fuel bill has risen sharply in recent years to about $20 billion annually. Government advisors saying the funds are better spent on education, agriculture, infrastructure and health projects.

Fitch's Colquhoun says across the region reforms to the fuel subsidies are significant, especially in Indonesia.

"With Indonesia the issue is less about the kind of savings per se it's more about whether the authorities are able to use the extra fiscal head room that they'll gain to deploy resources more efficiently perhaps into infrastructure or other areas of spending that would strengthen longer term growth prospects," he said.

Malaysia also announced an end to petrol and diesel subsidies from December 1st. The government said the moves towards a managed float was due to the world market price now being lower than local pump prices.

Thailand's National Energy Policy Committee says it plans to implement energy price reforms towards a further rise in diesel and liquefied petroleum gas prices.

Coping with higher interest rates

Lower oil prices will strengthen Asia economies ahead of higher U.S. interest rates in 2015, says chief strategist Chris Weston, at Melbourne-based trading house, IG Markets. In 2012, signs the U.S. would raise interest rates rattled the region's economies and currency markets.

"The fact is that the falls in oil prices has obviously seen domestic fuel prices falling in certain countries and that's allowed real [interest rate] yields to grow effectively. That's very compelling. So if you want to fund [invest in] government [bonds] in the future that’s a very good positive. The chances of an all-out run next year on emerging markets has been mitigated somewhat. We're not going to see what we saw in 2012," he said.

Economists say the lower fuel costs has already added to a positive outlook for Asia next year, with the Organization for Economic Cooperation and Development (OECD) saying the region will remain the fastest growing in the global economy.