In Southeast Asia, Cheap Oil Is a Double-Edged Sword

The winners and losers of collapsing oil prices in Southeast Asia.

Falling oil prices have hurt America’s enemies and helped revive a flagging global economy. But while broadly beneficial for Southeast Asia and beyond, cheap gas is not without its problems for the region’s emerging economies.

Oil prices have hit six-year lows this year at around $44 a barrel, with predictions from some analysts of a plunge to $20 amid lingering oversupply and weak demand. On February 10, Brent crude was trading at around $56 compared to its $115 level in June 2014, with the International Energy Agency (IEA) warning that “downward market pressures may not have run their course just yet .”

"It's the battle of the oil outlooks playing out here," John Kilduff, partner at New York energy hedge fund Again Capital LLC, told Reuters. "The IEA report is a good reminder that there's still a lot of supply to come and it doesn't give much hope for the bulls who say we've hit bottom and are now on the way up."

In a December 2014 report, the Asian Development Bank (ADB) said declining oil prices provided a “golden opportunity for many beneficial reforms.” Despite revising down its 2015 economic growth forecast for Southeast Asia to 5.1 from 5.3 percent, it noted the potential for an “upside surprise” given that most Asian economies are net oil importers.

“Falling global oil prices present a golden opportunity for importers like Indonesia and India to reform their costly fuel subsidy programs,” ADB chief economist Shang-Jin Wei said. “On the other hand, oil exporters can seize the opportunity to develop their manufacturing sectors as low commodity prices tend to make their real exchange rates more competitive.”

According to the Manila-based ADB, low oil prices could add 0.5 percentage points of growth this year for developing Asia, even at a forecast average Brent crude price of around $70 a barrel. The bank expects regional inflation to decline, falling to an estimated 3.5 percent in 2015, also helping to improve trade balances.

For Asian economies with little or no fuel subsidies, such as the Philippines, the lower inflation caused by weak oil prices should allow for “more dovish monetary policy than would otherwise have been possible,” according to Credit Suisse. But for oil exporters such as Indonesia, Malaysia and Brunei, the effects range from mildly beneficial to downright negative.

Indonesia: More gain than pain

Indonesian President Jodo Wikodo has taken advantage of lower prices to scrap gasoline subsidies, wiping $8 billion off the nation’s fuel bill, as well as hiking subsidized fuel prices by a third. Oil prices are particularly important to Indonesia, due to its position as Southeast Asia’s largest economy as well as its largest energy producer and consumer.

“The savings from the fuel price hike were about 1.1 percent of gross domestic product (GDP) but now the savings could be up to 1.5 to 2 percent of GDP,” Santitarn Sathirathai, an economist at Credit Suisse in Singapore, told the Financial Times. “That is free fiscal ammunition that they can use to support growth.”

ANZ Research expects headline inflation in Indonesia to plunge from over 8 percent to just 1.5 percent by year-end, with the current account and government finances both improving due to a halving of the previous $12 billion annual oil and gas trade deficit.

Cheaper energy is seen as a boon to the main island of Java, home to 70 percent of Indonesia’s population and four-fifths of its factories and with only limited production of oil and gas. But other regions that are reliant on resources and energy, including East Kalimantan, Sulawesi and Sumatra, are exposed to the effects of lower prices.

The Indonesia Petroleum Association has warned that low energy prices could force its members to curb capital expenditure by up to 20 percent this year, while state-owned energy company Pertamina has said it could cut spending by half should oil prices fail to recover. Low oil prices could also curb foreign investment in offshore oil and gas ventures, according to geopolitical intelligence firm Stratfor.

However, oil and gas-related revenues accounted for 14.4 percent of Indonesia’s budget in 2014, compared to the 20 percent spent on fuel and electricity subsidies, Stratfor noted.

“Even if government oil and natural gas-related revenues fall by half in 2015, subsidy reductions and eliminations will still give Jakarta a comfortable buffer to expand spending on infrastructure and social services,” it said.