Which Asian Countries Are Most at Risk From High Oil Prices?
Rising oil prices have created concerns about the cost of fuel subsidies across the region. Although these costs will increase, it is important to make distinctions based on each government’s ability to absorb the higher costs.
Indonesia and Malaysia stand out, with subsidy bills in excess of 1 percent of GDP last year when oil price averaged $80/barrel. Year-to-date, Brent prices have averaged $110/barrel. To put these numbers in perspective, back in the 2008 oil prices averaged $100/barrel and the subsidy bills in Indonesia and Malaysia exceeded 2.5 percent of GDP. No wonder markets are concerned.
Based on government estimates for every $10/barrel rise in oil prices Indonesia’s subsidy bill increases by Rupiah 26 trillion ($3 billion) and Malaysia’s by MYR2.5 billion (under $1 billion). But both Indonesia and Malaysia are oil producers, which means government coffers also benefit from higher royalty and tax revenues from the oil and gas sector.
Last year, Indonesia’s revenue from the oil & gas sector totaled 3.2 percent of GDP while for Malaysia it was 6 percent. Malaysia, however, has an edge over Indonesia given that it is a net exporter of energy and also receives dividends from Petronas (MYR 30 billion in 2010).
The ultimate impact of rising oil prices on Malaysia’s budget is slightly positive and we continue to expect bond supply to surprise on the downside. Although the net impact on Indonesia’s budget deficit is marginally negative (expected to increase the deficit by Rupiah 5 trillion), the government’s cash-rich position likely means no increase in net issuance for the year.
The other major oil producer in the region is Vietnam. In the past, Vietnam subsidized fuel prices heavily, but given the declining trend in oil revenues as a percentage of GDP, the government is aware that its traditional reliance on oil revenues is not sustainable unless new discoveries are made.
For 2011, the government is focused on reducing the budget deficit and announced an 18-24 percent hike in fuel prices in late February. If oil prices continue to rise, we expect more adjustments to fuel prices and, therefore, little pass-through to the government’s budget and bond supply.
As a non-oil producer, India’s subsidy bill is one of the highest in the region. In financial year 2008-2009, the government’s fuel subsidy bill was 1.4 percent of GDP, though last year it fell to 0.5 percent of GDP.
With limited oil-related revenues, a higher subsidy bill will pass directly into the government’s budget, given that oil bond issuance was discontinued in financial year 2010 -2011.
According to our estimates every $10/barrel rise in oil prices, India’s subsidy bill increased by Rupee 250 billion ($5.6 billion). Bond supply may increase if the subsidy requirement increases significantly. There is speculation regarding other possible funding sources, including the re-introduction of a tax amnesty and the large sums currently tied up in tax and/or licensing controversies.
However, these options are unlikely to be easily implemented. Given the government’s already elevated budget deficit, we believe concerns regarding subsidies will likely weigh on the bond market.
Thailand is an interesting case because the country uses an oil cess, or tax, to collect money for an oil fund that is used to control diesel and cooking gas prices. However, this fund is close to depletion – according to news articles, it was down to THB 4.5 billion ($150 million) as of mid-April from THB 12 billion at end-March. Given this backdrop, the government has decided to remove excise tax and VAT on diesel fuel during May-September to maintain the THB30/liter price.
This equates to THB 45 billion in lost revenues, although the government has indicated that higher-than-expected revenues from other sources should limit the overall negative impact. Higher oil prices are slightly negative for the Thai bond market.
China provides no explicit subsidy, but the government controls the price of gasoline and diesel to soften the blow to consumers. However, the government is committed to gradually passing on higher costs by adjusting price ceiling based on movements in oil prices. News articles suggest that the government may increase support if oil prices cross $130/barrel, but given China’s strong fiscal position, the government can easily absorb increased costs.
Others Sensitive to Inflation
Most other countries provide no explicit subsidy. However, governments are sensitive to increases in the cost of living, especially in an environment where food prices are high. In the Philippines, the government is providing a subsidy for public transportation such as Jeepneys and tricycles at an estimated cost of Philippine Peso 1 billion ($24 million) which will be financed by royalty payments from the Malampaya gas project.
In Hong Kong, the government has given HK$ 6,000 ($773) to each permanent resident above the age of 18 to help consumers cope with high inflation.
In South Korea and Taiwan companies are absorbing the cost in the near term. However, if oil prices rise steadily and remain elevated for a sustained period of time, the cost to both governments will increase. This is also true for Singapore, where the government may increase transfer payments to offset the higher cost of living.
However, these governments’ relatively strong fiscal positions provide them with a sufficient buffer to absorb any increase in transfer payments and we expect a negligible impact on budget balances and bond supply.
Prakriti Sofat is an economist with Barclays Capital for the Asia region with a focus on Indonesia, Philippines, Vietnam and Sri Lanka.