Thailand
Malaysia a clear-cut winner if oil price rally continues, says Nomura
KUALA LUMPUR: Saudi Arabia, Nigeria, Colombia and Malaysia are the clear cut winners if the recent oil price rise continues and is more supply-side driven, says Nomura Global Markets Research.
In its emerging markets (EM) insight, it said for the emerging economies, the large net oil importers with weak economic fundamentals would possibly be more impacted by the rally in oil prices than it would benefit large net oil exporters.
“We assess the potential impact of sustained, higher oil prices on 26 EM economies. The clear cut winners include Saudi Arabia, Nigeria, Colombia and Malaysia, and the clear-cut losers are Turkey, India and the Philippines,” it said.
Malaysia (clear-cut winner): Although Malaysia has become a small net importer of oil (crude oil and refined petroleum; 0.2% of GDP), it remains a major exporter of LNG (3.0% of GDP) – the price of which is closely linked to oil, but with a few months lag. Therefore, it remains a large beneficiary of higher oil prices.
“We estimate every US$10 a barrel increase in the price of oil would widen the trade surplus by about 0.4% of GDP, which would help to keep the current account in a comfortable surplus (3.6% of GDP as of Q4 2017),” it said.
As the government has removed fuel subsidies, CPI inflation is therefore more sensitive to oil prices. Nomura Research’s estimates show that the CPI would rise by about 0.6pp on a US$10 a barrel rise in oil price.
If the current level of oil prices is sustained, fuel prices could rise sharply after the general election is held on May 9 and 2018 CPI inflation could rise above its 2.5% forecast towards the top end of Bank Negara Malaysia’s (BNM) 2%-3% forecast range.
However, the government still collects sizable oil revenues (14.8% of 2018 total budgeted revenue). This would provide more fiscal room after the general election and reduce the need to significantly cut spending in H2 to meet the full-year fiscal deficit target of 2.8% of GDP.
“Overall, higher oil prices would raise upside risks to our GDP growth forecast of 5.5% in 2018 from 5.9% in 2017. This, in turn, could provide space for Bank Negara Malaysia, which we expect to stay on-hold in 2018, to further normalise monetary policy, raising the risk of another 25bp rate hike later this year,” it said.
Saudi Arabia (clear-cut winner): As OPEC’s biggest oil producer, Saudi Arabia stands to gain substantially from a sustained rise in oil prices.
Nomura Research estimates that a 10% increase in oil prices would boost GDP growth (IMF projects 1.7% in 2018) by one percentage point (pp) and increase the current account surplus (IMF projects 5.4% of GDP in 2018) by 2.5% of GDP.
“We estimate a modest, 0.1pp impact on inflation, as we would expect higher oil prices to stimulate economic growth but not inflation (IMF projects 3.7% in 2018).
“Moreover, increased energy-related government revenues should help to further reduce the fiscal deficit, which narrowed from 17.2% of GDP in 2016 to 9.0% in 2017, and the IMF projection of 7.3% in 2018 could be undershot,” said the research house.
One area of concern, however, it pointed out was the potential for high oil prices to lead to complacency and consequently a lapse in structural reform efforts that could weigh on long-run potential growth. A further rise in oil prices could also be associated with increased geopolitical instability in the Middle East.
Nigeria (clear-cut winner): The positive impact on GDP growth from a 10% price change in oil alone is fairly large at 0.6pp, and it would add 0.8pp of GDP to the current account balance (IMF projects 0.5% of GDP in 2018), by its estimates.
The lack of onshore refining capacity, however, means that changes in the spread between petrol and oil are important. A 10% increase in oil prices would increase consolidated government revenues by about 0.5% of GDP.
“Fiscal subsidies can absorb some of the inflationary effects, and so we see a moderate 0.4pp impact on CPI inflation from a 10% oil price shock, adding to already-high CPI inflation (IMF projects 14% in 2018), but this could be mitigated by exchange rate appreciation,” it said.
Other clear cut winners are Colombia, Brazil, Russia and Venezuela
Colombia (clear-cut winner): In an environment in which the economy is expected to accelerate but still grow below potential, higher oil prices offer some potential upside for growth (a 10% oil price increase could add about 0.3pp to GDP growth).
Brazil: The country’s external accounts already stand as a clear positive and should benefit, even if only marginally, from higher oil prices.
Russia: A 10% increase in oil prices would raise GDP growth by 0.7pp and improve the current account balance by 1.2% of GDP.
Venezuela: The political situation in Venezuela remains very complicated. Hyperinflation in the context of economic contraction and capital outflows remains the norm. Therefore, we believe an increase in oil prices, while a net positive, would do little to change the economic outlook of the country in the near term.
Losers
Turkey (clear-cut loser): Although Turkey is a moderately large net oil importer when compared to other EMs, Nomura regards it as one of the larger EM losers in a high oil price world, because the economy is starting with very weak fundamentals, including double-digit inflation and large twin deficits.
India (clear-cut loser): Rising oil prices risk reversing the improving economic fundamental “sweet spot” experienced during 2014-16, at a time when there are heightened market concerns over pre-election populist government policies, the costs of cleaning up the banking sector and the lack of progress in rejuvenating private investment.
Nomura estimates every US$10 a barrel rise in oil price would worsen the current account balance by 0.4% of GDP, increase inflation by 30-40bp, hurt growth by 15bp and worsen the fiscal balance by 0.1% of GDP.
For instance, if Brent oil averages US$75 sustainably in 2018, the research house estimates the current account deficit would widen to 2.5% of GDP in 2018 from 1.5% in 2017.
Additionally, rising inflationary risks would push the Reserve Bank of India (RBI) to hike cumulatively by 50bp in H2 2018 against our current base case of no change.
In fact, the economic effect could exceed our estimates, as the government could decide against raising petroleum product prices in the year preceding general elections, instead choosing to lower the excise duty on these fuels and reduce tax revenues instead.
India’s exposure to oil prices is most prevalent in the external sector, while inflationary risks are also significant.
However, India’s fundamentals (growth, inflation, twin deficits, reform outlook) are in a much better position and its FX reserves (at over 10 months of import cover) are much higher than in 2013, so the RBI has the wherewithal to defend the currency.
Philippines (clear-cut loser): Importing almost all of its oil needs, Nomura estimates a US$10 a barrel increase in oil prices could increase the trade deficit by 0.5% of GDP, which would significantly pressure a current account deficit that already reached 0.8% of GDP in 2017 due to strong import demand.
CPI inflation – which rose to 4.3% y-o-y under the new 2012 base year in March – could rise by 0.2pp with a relatively quick pass-through given no fiscal subsidies.
This would push CPI inflation even higher above the 2-4% inflation target of Bangko Sentral ng Pilipinas, further supporting our call for 75bp of policy rate hikes this year starting in May, and there are risks of more rate hikes should oil price increases persist and second-round effects rise more quickly given the strength of domestic demand.
Chile: Higher oil prices are negative for the economy, but Nomura would expect higher copper prices and low inflation to lessen the impact. Economic growth has been accelerating after the election of pro-market president Sebastian Piñera.
Indonesia: Despite being an oil and gas producer, Indonesia has been a net importer of these commodities (0.8% of GDP) since 2012 due to falling production and a lack of investment.
“We estimate every US$10 a barrel increase in the oil price would lower the trade balance by 0.2% of GDP, which poses an upside risk to our current account deficit forecasts of 2.0% of GDP in 2018 (1.7% in 2017).
“Higher oil prices would also increase downstream inflation pressures, which should still creep into CPI inflation despite the government’s pledge to keep subsidised fuel prices unchanged.
“Such a scenario could add a small 0.1pp to the current CPI inflation rate of 3.4% y-o-y (as of March), which should still stay within Bank Indonesia’s 2.5-4.5% target. The combination of a wider current account deficit and higher CPI inflation should further reduce the room for more policy rate cuts by Bank Indonesia (BI), though rate hikes also remain unlikely,” it said.
The 2018 fiscal subsidy allocation for energy has declined substantially to 0.6% of GDP (from 3.2% in 2014) but higher oil prices would pose upside risks to our 2018 fiscal deficit forecast of 2.6% of GDP, which is above the budgeted 2.2% and 2017’s 2.4% but still within the 3% limit.
Indeed, with an eye on upcoming elections (regional elections on 27 June 2018 and presidential on 17 April 2019), the government might increase fuel subsidies to help contain retail energy prices, but at the cost of a larger fiscal deficit.
Peru: Higher oil prices will have a marginal net negative effect as metal prices have also been rising. Despite the political noise related to the recent impeachment of the president, the economy remains on track to grow by 3.8% this year. The country is a net importer of oil, gas and derivatives despite its status as an exporter of natural gas.
Romania looks to be most exposed Central European country to an oil price shock. The current account deficit reached 3.4% of GDP in 2017 and, in light of higher oil prices and amid stimulatory fiscal policy, we believe it could easily top 4% of GDP this year.
Thailand: As a percentage of GDP, Thailand is one of the largest net oil importers in EM, running an oil trade deficit of over 4% of GDP in 2017, but the economy is starting from a relatively strong external balance position.
“While we estimate that a US$10 a barrel increase in oil price would worsen the trade balance by about 0.8% of GDP, this would be manageable, given our forecast of a large current account surplus of 8.5% of GDP in 2018 which, in turn, is supported by tourism receipts and electronics exports.
“We estimate a US$10 a barrel increase in oil price would lift headline CPI inflation by 0.2pp, but inflation is starting from a very low level: we forecast CPI inflation of 0.7% in 2018, while the government has reduced the pass-through by allowing lower increases in retail fuel prices.
“Thus, even with a large oil price shock, inflation is likely to remain well within the Bank of Thailand’s 1-4% target range. In addition, still-weak domestic demand conditions will likely limit the increase in core inflation. We would therefore still expect the Bank of Thailand to leave policy rates unchanged through 2018-19,” said Nomura.
Source: https://www.thestar.com.my/business/business-news/2018/04/26/malaysia-a-clear-cut-winner-if-oil-price-rally-continues-says-nomura/#kaS6bCmJZ3pdj4e6.99