Lower oil prices temper inflation pressures in PH, other Asean states

Falling global oil prices will temper local consumer price pressures and slow down the pace of monetary tightening by the Bangko Sentral ng Pilipinas next year, Swiss investment bank UBS said.

In a research note dated Dec. 3, UBS reduced its inflation forecast by 30 to 40 basis points and its central bank policy rate projections by 25 basis points in 2015 for the Philippines, India, Indonesia, Malaysia and Thailand.

“We now look for lower policy rates in Malaysia and Thailand, where policy rates were previously on hold. In India and Indonesia, we look for more policy rate cuts than previously and in the Philippines, we now look only for a solitary 25-basis point hike in 2015,” UBS economist Edward Teather said in the research note.

UBS’ baseline oil price forecast now looks for the Brent oil price to average $70 a barrel in 2015, thereby putting downward pressure on inflation outlook relative to its previous assumptions and presenting more room for policymakers to either lower policy interest rates or keep rates lower for a longer period.

“Generally, lower oil prices transfer income from oil producers to oil consumers. The geographic concentration of the world’s oil production means a transfer of income across borders,” the UBS economist said.

“We expect net energy importers India, Thailand, Philippines and Singapore to record more positive current account balances than previously. India’s current account might come close to surplus,” he added.

As lower oil prices would transfer income to oil consumers from oil producers, UBS revised upward the current account balance projections for India, Thailand, Philippines and Singapore.

“We also believe that lower oil prices can help Philippine growth bounce back from a weak third quarter 2014,” the economist said.

UBS sees the Philippine domestic economy expanding by 6 percent next year and 5.8 percent in 2016 from around 5.9 percent this year.

Year-on-year growth as of the third quarter disappointed at 5.3 percent versus the consensus forecast of 6.4 percent.

UBS reduced its Philippine inflation rate forecast for 2015 to 3.7 percent from 4 percent. For 2016, UBS sees an average inflation rate of 4.3 percent.

The Philippine current account balance is also seen to increase from 3.7 percent of gross domestic product this year to 4.9 percent in 2015 and 4.5 percent of GDP in 2016.

In Southeast Asia, Teather said lower oil prices would also imply a meaningful transfer of income from the oil and gas producing sectors of Malaysia and Indonesia to other countries. The economist sees little impact on Indonesia’s external balance but a significant deterioration in Malaysia’s current account surplus.

“Lower oil prices driven by improved supply should be positive for growth. In addition to redistributing income toward consumers, the reduced cost of oil as an input into the production process should enhance potential growth. Unfortunately, we suspect part of the reason for lower oil prices is weaker industrial activity growth in Asia which limits our inclination to revise higher our growth estimates, although downside risks are reduced,” according to the research report.

Separately, the economist said reduced oil exporter surpluses might retard the flow of petrodollar liquidity into the global financial markets. This is seen unhelpful for Indonesia, which has been borrowing overseas partly to invest in coal mining.

UBS also downgraded its Malaysian growth estimates to reflect lower sentiment and investment in the oil and gas sector.