South Korea's 10.5 trillion won ($10 billion) spending package to aid cash-strapped households and businesses may herald fresh measures by Asian governments to shield their economies from record oil prices.
Crude oil jumped $10.75, the largest one-day increase, to $138.54 a barrel in New York on June 6 and touched an all-time high of $139.12. Japan's Trade Minister Akira Amari, hosting a weekend summit of the world's biggest energy users, warned the global economy may slide into a recession.
“There's a greater risk of a more severe economic downturn across the region,'' said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. “We'll see more moves by governments to try and protect their populations against fallout from spiraling oil prices.''
Prime Minister Han Seung Soo yesterday announced income-tax rebates for three-quarters of South Korea's 13 million workers, and subsidies for truckers, farmers and fishermen struggling with soaring fuel costs. Malaysia's government will provide measures next week to ease the impact of rising energy prices, the Star newspaper reported on June 7.
“The steps show South Korea's government is very serious about rising oil costs and the impact on the economy,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. “The move will help reduce the risk of a further economic slowdown. It's likely to prompt other countries to follow suit.''
Japan Summit
Oil prices have more than doubled in the past year, stoking inflation and threatening to roil economies across the region already grappling with cooling export demand because of the U.S- led global slowdown.
Crude oil fell 0.6 percent to $137.68 a barrel in after- hours electronic trading on the New York Mercantile Exchange at 11 a.m. in Singapore. The MSCI Asia Pacific Index of stocks lost 1.4 percent to 148.25 as of 12:03 p.m. in Tokyo.
Energy ministers from the Group of Eight industrialized nations plus China, India and South Korea said yesterday they'd establish the International Partnership for Energy Efficiency Corporation aimed at increasing energy efficiency.
“If we leave this situation as it is, it could lead to a recession of the world economy,'' Japan's Amari said in an address yesterday.
`Below-Trend' Growth
The International Monetary Fund's John Lipsky said the gain in oil adds “downward pressure'' on global growth.
By the second half, all major economies will be growing “below trend,'' Lipsky, the IMF's first deputy managing director, said in a June 7 interview in St. Petersburg, Russia. Emerging markets will grow above the average of the last 10 to 15 years, although at a slower pace, he said.
“Governments are at the point where they have no choice but to reduce the burden on consumers,'' said Susumu Kato, chief economist at Calyon Securities in Tokyo. “We are likely to see more of these moves to sustain growth by aiding consumers and companies.''
Japan, China, India and South Korea, together with the U.S., account for half of the world's energy consumption. Morgan Stanley forecasts oil prices may reach $150 within a month.
Japan's government announced plans in December to spend 215 billion yen ($2.1 billion) through March 2009 to ease the burden of higher oil costs on companies and households.
Decade-High Inflation
“It's inevitable as the price goes higher, you'll see more governments trying to offset the effect,'' AMP's Oliver said. “The trouble is oil prices also impact on inflation.''
Policy makers in Asia, where about 600 million people survive on less than $1 a day, have been divided between the need to shore up economic growth and to rein in surging prices. The region's inflation will reach a decade-high this year even as economic growth cools, according to the Asian Development Bank.
Central banks in Indonesia and the Philippines both raised interest rates on June 5 to quell price pressures. Vietnam and Pakistan boosted borrowing costs last month.
The Bank of Korea has left the nation's benchmark interest rate unchanged at a seven-year high of 5 percent since August, saying inflation remains a threat. Two board members at the April meeting called for a rate cut to buoy domestic demand.
Rising oil prices, along with the U.S. slowdown, are “jolting the economy,'' Japanese Economic and Fiscal Policy Minister Hiroko Ota said on Asahi TV yesterday. “I'm very cautious about the outlook for the economy.''
Fewer Subsidies
Some Asian governments, facing mounting budget pressures, are winding down subsidies that have kept fuel prices below market rates and affordable for households.
Indian Prime Minister Manmohan Singh said this month's fuel- price increase was “inevitable'' in helping to protect government finances and narrowing oil refiners' losses. “There are limits to which we can keep consumer prices unaffected by rising import costs,'' he said.
Sri Lanka, Indonesia and Taiwan over the past month raised fuel prices. Malaysia last week said the cost of 97-RON grade gasoline will now be adjusted monthly to track global prices, while Tenaga Nasional Bhd., the government-controlled power producer, will be allowed to raise electricity prices from July.
“Many Asia countries face this quandary: they have artificially depressed prices but that is costing the governments more in terms of subsidies,'' AMP's Oliver said. “Whichever way you cut it, the rise in oil prices is going to cause economic problems and it's going to impact on inflation.''
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