The Persian Gulf crisis sent stock prices tumbling throughout Asian markets Monday as the threat of war and higher energy prices fueled worries of a slowdown in the world's fastest growing economic region.
Fears that inflation would push up interest rates in Japan helped send share prices on the Tokyo Stock Exchange down by 4.2%, the biggest drop in two years. On other Asian exchanges, share prices dropped 5.8% in Taiwan, the biggest loss in two years; 4% in Singapore; 1.5% in Seoul, to a record low, and 3.7% in Manila. In Hong Kong, the key Hang Seng index dropped 1.2%, as fears of a Gulf war were slightly offset by a cut in interest rates.
But most analysts were confident that higher oil prices would not seriously retard Asia's go-go growth. Since reeling from the oil shocks of the 1970s, many of the Pacific nations have significantly reduced their dependence on foreign oil, diversified their supplies and increased their strategic petroleum reserves.
The specific impact on Asian nations varies widely. Guy Pauker, senior consultant for RAND Corp., said the regional effects would range from a "disaster" for the Philippines, which is short of energy and the foreign exchange to buy more with, to a "Christmas" for Indonesia, Asia's top oil exporter. Overall, increased energy prices threatened slower growth and higher inflation for the oil importers of Japan, South Korea, Taiwan and Hong Kong but a bonanza of profits for the exporters of Indonesia, China, Malaysia and Brunei.
"For the oil importers, it's a mixed picture, and I think that's probably the reason you're seeing the stock markets discount future earnings," said Ronald Solberg, first vice president and senior international economist for Security Pacific Corp. "But the region is generally probably able to better withstand the shock than other regions today."
Solberg said Asia's robust economic growth has been driven by investment spending and new capital stock. As a result, the nations are probably more energy efficient than other regions in the world. He also said Asia's economic hallmark--resiliency and adaptability to changing global economic conditions--would help it weather the crisis.
He predicted that higher energy prices would slow regional growth by less than 1% and increase inflation by 1% to 2%. In an area where rates of growth range from Japan's 4% to South Korea's 9% to double-digit growth for Thailand, such a slowdown won't significantly affect the overall economic health, he said.
The biggest loser could be the Philippines, many analysts agreed. The nation has suffered energy shortages and frequent brownouts during the past year, but local opposition has prevented the development of nuclear power as an alternative. A drought has cut its generation of hydroelectric power.
And the Philippines simply can't afford higher energy prices. It is currently saddled with a $28-billion foreign debt, whose interest payments consume half its export earnings. Its recent catastrophic earthquake is likely to soak up hundreds of millions of government dollars in repair and recovery efforts. And recent attempts to increase the market price of oil sparked a wide-scale strike by drivers of jeepneys, the local bus.
A survey by Security Pacific Corp. found that the Philippines could suffer the most from higher energy prices, because its net oil imports comprise the highest proportion of its domestic energy consumption.
"If you take the whole area in Southeast Asia, there is nobody in the same straits as the Philippines," said Rand's Pauker. "It couldn't be worse, and I don't see any remedy."
In South Korea, the business mood is "grim," said Kanghi Lee, executive director of the Korea Business World, a monthly economic journal in Seoul. That's because the nation is heavily dependent on the energy intensive industries of steel, shipbuilding and petrochemicals. For instance, Lee said the private and public sector had targeted $6.2 billion in investment in the petrochemical industry in the next two years, but the Persian Gulf crisis would likely cause a reconsideration of those plans.
South Korean firms have also tripled the value of their construction contracts in Iraq, to $300 million last year from $100 million in 1989. The crisis will thus cause them to forgo significant business and write off millions of dollars in loans, depressing corporate earnings, Lee said.
Still, South Korea has moved to diversify its energy supply in the past decade. It has installed 10 nuclear power plants and plans six more in an effort to eventually rely on that alternative source for 40% of its energy needs. According to the Ministry of Energy, the nation expects to reduce its oil dependence from 23% of total power capacity in 1988 to 11% in 2001.
Japan, whose oil import bill of $26 billion in 1988 is larger than all other Asian nations combined, is significantly less vulnerable today than during the oil shocks of the 1970s, when prices quadrupled. Japan has increased its petroleum reserves to 142 days from 60 days in 1979. It has reduced its dependence on oil imports as a percentage of gross national product to 0.8% in 1989 from 2.2% in 1978, according to the Japan Economic Institute in Washington. Japan also has broadened its energy supply source, relying more on nuclear energy and liquefied natural gas, and is currently researching power generation through new technologies such as superconductivity.
And Japanese industry, devastated by runaway inflation caused by oil price hikes in the 1970s, has gradually shifted from the energy intensive heavy industries to high technology.
"We don't think that this incident will cause significant problems to the Japanese economy in the short or medium run," said Hiroaki Ishii, first secretary of the Embassy of Japan in Washington. "We have planned a long time based on our previous experience with the other two oil crises."
For Taiwan, Kuwait is its second-largest supplier of oil after Saudi Arabia, accounting for 14%. The state-owned oil monopoly, China Petroleum Corp., has dispatched a team to Saudi Arabia to negotiate for more oil, a government spokesman said. But the higher world energy prices have not yet affected the island republic's businesses, because the state has not raised Taiwan's prices and probably won't for at least two months, said Chia-Sheng Pan, director of the economic division for the Coordination Council for North American Affairs, Taiwan's unofficial diplomatic representative.
Taiwan has reduced its dependence on Mideast oil to 60% today from 80% a decade ago. And the republic's largest firm, Formosa Plastics Co., has asked permission to set up a manufacturing plant in mainland China in part as a way to reduce energy costs.
Hong Kong doesn't expect many significant direct effects of the higher oil prices. Its garment, textile, electronics and other light industries don't consume much energy. And over the past decade, the British crown colony has nearly completed a shift from oil to coal as the energy source for its electric power.
Most of Hong Kong's oil comes not from the Mideast but from Singapore, one of Asia's largest oil refiners.
"Our main concern is not the direct impact of oil prices on the Hong Kong economy, but rather the impact on the major economies. If they enter into a recession because of these events, that will have a major impact because we are still so trade dependent," said Esmond K. Y. Lee, principal assistant secretary of Hong Kong's economic services branch.
The Oil Exporters
For Asia's oil exporters, however, the Persian Gulf crisis promised higher profits and a boom in new energy exploration. In August, Indonesia's state-owned oil company hiked its crude oil prices to $19.19 per barrel from $14.81 in July. Prices are set monthly by a state formula, which averages the price of five spot oil markets in the Western Pacific. As a result, the price today is still lower than the spot price of $26.77 a barrel.
Indonesia exports more than half of the 1.3 million barrels of oil it produces per day. The largest customer is Japan at 300,000 barrels, followed by the United States at 250,000 barrels and the rest consumed by Taiwan and South Korea, said Omar Sumaryono, head of marketing in Los Angeles for the state-owned oil firm, Pertamina.
"It's simply arithmetic. The higher the price, the more money we get. But my feeling is that the traders who do business with us are the ones who enjoy the maximum profit of this situation."
Other energy-rich Asian nations could indirectly benefit by greater investment in exploration and development. Although Thailand is a net oil importer, it owns vast natural gas reserves in the Gulf of Thailand. Malaysia is a leading exporter not only of oil but also liquefied natural gas. Australia's coal industry could boom.
"Realistically, there's going to be some effect, but unless the crisis is really bad and lasts a long time, they will not only weather it, they may even benefit if it leads to further exploration and development of energy resources that are right in the Pacific basin," said Gregg Ireland, vice president of Capital Research Co., a Los Angeles-based investment and management firm.
"In a perverse way," he said, "you can imagine this region coming out better."
TUMBLING STOCK INDEXES IN ASIA
How key Asian stock indexes have fared since the Aug. 2 invasion of Kuwait by Iraq.
Aug. 2 Monday Point Percent Country/stock index close close drop drop Taiwan/Taipei Weighted Index 5,450.42 3,884.89 -1,565.53 -28.7% Singapore/Straits Times Industrials 1,532.50 1,288.89 -243.61 -15.9% Japan/Tokyo Nikkei 30,245.18 26,176.43 -4,068.75 -13.5% Philippines/Manila Composite 937.99 824.78 -113.21 -12.1% Malaysia/Kuala Lumpur Industrials 622.77 548.73 -74.04 -11.9% Hong Kong/Hang Seng 3,415.18 3,040.28 -374.90 -11.0% South Korea/Seoul Composite Index 688.28 645.86 -42.42 -6.2% Indonesia/Jakarta Composite 612.22 591.97 -20.25 - 3.3% *U.S./Dow industrials 2,864.60 2,746.78 -117.82 - 4.1
Sources: Data Resources and Times wire services