Oil Prices `Blessing in Disguise' for Asia, Jen Says

Oil Prices `Blessing in Disguise' for Asia, Jen Says
(Bloomberg – Kim Kyoungwha)

Record oil prices are “a blessing in disguise” for Asian economies and currencies as high transport costs will force the region to become less reliant on exports and more on local demand, Morgan Stanley said.

Surging oil prices that are raising Asian exporters' costs to ship everything from cars to clothes to the West will encourage them to rely on domestic customers and this will help reduce global imbalances, according to Stephen Jen, chief currency strategist at Morgan Stanley in London. Crude oil reached an all-time high of $141.67 a barrel today.

“In the short run, this is clearly a negative shock to Asia, and for Asian assets, including currencies,” Jen, who used to work at the Federal Reserve and the International Monetary Fund, wrote in a report yesterday. “In the long run, however, this shock could accelerate the move away from exports.”

Global imbalances “should normalize” as Asia's trade and economic growth, which have thrived partly due to the low cost of transport in the past two decades, are affected, Jen said.

Five of the 10 most-active Asian currencies outside of Japan fell this year, led by a 12% decline in the Thai baht and an 11% loss in South Korea's won, according to data compiled by Bloomberg. Taiwan's dollar and China's yuan are the biggest gainers.

Oil prices have more than doubled over the past 12 months, causing global inflation to accelerate and prompting some governments in Asia such as Indonesia and Malaysia to increase local fuel prices.

Japan's household spending slumped in May, the ratio of jobs available fell to a three-year low and the inflation rate almost doubled, data showed today, signaling that the economy's longest postwar expansion may be over. New Zealand's economy contracted 0.3% last quarter, putting the nation on the brink of its first recession in 10 years, while India's inflation accelerated more than estimated to the fastest pace in 13 years.

Rising oil prices are also bolstering import bills and squeezing trade accounts in Asia. South Korea posted a current account shortfall for a sixth month in May, the longest run of deficits since the 1997 Asian financial crisis, data showed today.

High transport costs act like “tariffs” and undermine trade, Morgan Stanley's Jen said, adding that the increase in oil prices coincided with the decline in China's re-exports. Asia exports raw and intermediate goods to China, and China, in turn, applies the final phase of production before shipping manufactured goods overseas. The proportion of goods that are first imported from elsewhere and then re-exported out of China declined to 44% from 57% in late 2001, Jen said.

“The ultra positive long-term outlook many investors may have on Asia should be tempered somewhat,” Jen said. “High costs of transport will act as a temporary headwind for many Asian currencies.”

The Baltic Dry Index, a measure of shipping costs for commodities, gained for a second consecutive day. The index tracking transport costs on international trade routes advanced 229 points, or 2.5%, to 9,473 points, according to the Baltic Exchange in London.

While this oil “shock” may encourage more regionalization as high transport costs erode some differences in labor costs, financial globalization is likely to continue to accelerate, according to the report. More global capital should be attracted to Asia, Jen said.

“The root cause of high transport costs will be a main driver of financial globalization,” he said. “Financial protectionism is likely to be a more serious issue than trade protectionism.”