Rising oil prices bring worries to Asia

International oil prices have risen all the way this year, and the year-to-date cumulative increase is close to 20%. As the Asian economy is highly dependent on oil, soaring oil prices may cause Asian economic growth and stock market performance concerns.

In Asia (excluding Japan), net imports of oil are required except for Malaysia, and net imports account for approximately 4% of the region's GDP. In the overall import trade of Asia (excluding Japan) in 2011, the proportion of oil imports was as high as 18%. At the same time, 26% of the energy demand in the region in 2010 was oil. If China and India, which are dominated by coal, are not counted, the ratio will rise to 46%. Morgan Asset Management believes that a sharp rise in oil prices will have a direct impact on Asia's trade balance, economic growth, inflation, burden of government subsidies, and corporate profits.

First, Thailand and South Korea, which have the largest oil and gas balance in the region and the highest oil consumption intensity, will suffer the most. If the price of crude oil rises by 10 US dollars per barrel, the trade balance between the two countries will drop by about 1% of the GDP. In contrast, Malaysia, a net oil exporter, can benefit from the rise in oil prices, and its trade balance increase is expected to reach 0.2% of GDP.

Second, if oil prices continue to rise by 10%, the growth of Asian countries’ GDP will be reduced by 10 to 45 basis points. Among them, South Korea and Thailand are the most sensitive and they both reduce 45 basis points.

Third, a sharp rise in oil prices will push up input costs and increase inflationary pressures in the following quarters. If the increase in oil prices were fully transferred to local prices, the oil price per barrel rose by 10 US dollars, and the consumer price index for Asia (excluding India) was estimated to increase by an average of 0.6%. South Korea may suffer the most, the consumer price index will rise by 1%, and India's wholesale price index will also rise by 0.9%. Singapore and Hong Kong, China, are less affected by the low proportion of energy.

Fourth, India, Indonesia, and Malaysia use their budgets to provide direct subsidies for fuel. If these countries do not correspondingly increase local fuel prices, their fiscal balance may deteriorate significantly. If the price of oil rises by $10 per barrel, the growth rate of subsidies for India and Indonesia is estimated to reach 0.3% of GDP, and Malaysia will be as high as 0.6%.

In the end, a significant increase in oil prices will depress Asian cycle stocks, because the burden of oil prices will affect corporate profits, especially the manufacturing and downstream oil companies will be the most dragged down, and upstream oil companies are expected to benefit from it. Historically, Morgan Stanley’s return on the Asian (United States) index has often echoed the peaks and troughs of oil price movements. In other words, if the price of oil rises sharply, it may cause the year-to-date rise of the Asian stock market to end prematurely.