World Economy Whistles in the Dark

HONG KONG

The forecasts could hardly look better.

In drumbeat fashion, the World Bank, the International Monetary Fund and the Asian Development Bank in recent days all have weighed in with bullish projections for Asia’s economic growth for the rest of this year and next.

Not only do they predict the region as a whole will continue its climb out of the 1997 financial crisis at a rate far faster than earlier believed, but there are also signs that the long-slumbering Japanese economy--by far the region’s largest--may finally be stirring.

But then came crude oil prices approaching $40 a barrel.

East Asia’s equity markets, already in the doldrums, tumbled further, with stocks in Jakarta and Taipei hitting new lows for the year. As the dust settled late last week, investors remained skittish and the depressed mood that hung over much of the region seemed to mock the rosy forecasts.

In part, the dramatic reaction to the jump in oil prices reflects how vulnerable many of Asia’s economies remain three years after the crisis hit. But it also reflects other worries that have combined to sap investor confidence in recent months: worries about an economic slowdown in the United States, fears of possible interest rate hikes and the possible impact of political instability.

“The oil price hike is an added burden we need least of all at this point,” summed up Geoffrey Barker, chief economist at HSBC Holdings in Hong Kong.

A freshly vulnerable Asia adds to growing international economic uncertainty as soaring oil prices and a collapsing euro threaten to slow growth in Europe, creating new pressures on the strong but slowing U.S. economy.

Oil price rises are especially problematic for Asia, where many nations are woefully inefficient in their use of energy. Only Japan has taken major steps to streamline its use of petroleum.

Compared with 1970, Japan now uses only half as much oil per unit of economic output.

“The figure has been dropping for a long time as Japanese companies invest in more energy-efficient equipment,” said Junichi Makino, an analyst with Daiwa Research Institute.

The United States, by comparison, uses 55%, Europe 59% and Asia (excluding China and Japan) 101% of 1970 levels per unit of output, according to HSBC figures. Asia’s much higher level reflects in part its stage of development.

As the United States and Europe invested heavily to reduce the oil component in their economies in the wake of the 1970s oil crisis, much of Asia was busy instead expanding an industrial base that would produce the Asian economic miracle of the 1980s. And as Asia’s emerging middle class moved from bicycles to scooters and cars, dependence on oil grew.

Though several economists in the region are sticking to their optimistic growth figures for Asia as a whole, they now add a caveat: Crude oil prices must stay under $35 a barrel.

“Our update is still valid,” said Brahm Prakash, assistant chief economist for the Asian Development Bank in Manila, which upgraded its projected gross domestic product growth for Asia from 6.2% to 6.9% for the current year, followed by a strong 6.5% for 2001. The study is based on strong domestic demand and sustained export growth for the region.

However, Prakash added that several months of $35-to-$40 crude would probably cut the 2001 figure by about 0.5%.

For oil-producing nations such as Indonesia and Malaysia, higher crude prices can actually boost growth, but they can also bring new problems. In Jakarta, any oil windfall is expected to add pressure from international lending institutions on an already shaky government to implement unpopular economic reforms.

Oil analysts believe a decline in crude prices is possible, although they admit that in the short term much will depend on the severity of the coming American and Northern European winter.

“Whether the winter is mild or cold can make a huge difference in terms of available [oil] supplies,” said James Lister-Cheese, who tracks economic trends at Independent Strategies in London.

Some analysts believe the real challenge for Asian policymakers is simply not to panic. In the current climate of uncertainty, they must avoid emergency packages that could inadvertently throw economies off course.

“If people [in government] hold their nerve, we’ll look back at this as a brief rough spot in the recovery,” said Tim Conlin, chief Asia economist for ING Barings in Hong Kong. “If they don’t, the trouble could get much worse.”

It’s advice easier given than carried out--for much of Asia’s shortage of confidence is rooted in two hard realities:

* The big growth projections for much of the region are impressive only in percentage terms, because many national economies are still recovering from an exceptionally low, post-crisis base. In real terms, many are reaching only pre-1998 levels.

* Large commercial and public debt accumulated during the run-up to the 1997 crisis still hangs over many Asian economies, hampering investment required to sustain current growth rates over the medium term. The debt burden also makes these economies especially vulnerable to any round of interest rate hikes.

“Whether it’s corporate debt in [South] Korea, personal debt in Hong Kong, public enterprise debt in China or all the bad debt in the banking systems of Southeast Asia, the central underlying problem is debt,” economist Barker said. “The region is still in a transitional phase, so there’s a strong sense of vulnerability when something unexpected happens like the oil price hikes.”

While Japan has its own debt problems, the expected impact of higher oil prices on the world’s second-largest economy will be far more modest than in most other Asian nations, economists said.

They believe higher oil prices could hurt export industries such as automobiles elsewhere in Asia, but possibly actually benefit Japanese producers such as Toyota and Honda, which make smaller, more energy-efficient cars than General Motors, Ford and DaimlerChrysler.

“As prices double, the last thing you want to do is buy a gas guzzler,” said Gerry Evans, a strategist with HSBC Securities in Tokyo.

Analysts say that Japanese consumers also are less concerned with higher oil prices, in part because they feel them less. Japanese gas stations are not required to post their prices prominently in the same way most U.S. stations do.

Instead, drivers tend just to ask for a full tank and so are less sensitive to changes, even though gas is currently selling for close to $4 a gallon.

The one contingency that could really hurt Japan is the shared nightmare for the entire region: a protracted period of higher oil prices that ends up derailing the U.S. economy. Given the strong dependence by all Asian nations on exports to the United States, it would quickly undercut regional prospects.

Barring that scenario, however, the dangers to Japan are not great, analysts believe.

“The negative impact on the economy--unless oil prices really keep rising--will be modest,” said Tomoko Fujii, senior economist with Nikko Salomon Smith Barney Ltd.

The same cannot be said for South Korea, however. If oil remains at $30 a barrel next year, on average, Korea will be hit hard, said Lee Sung-Kwon, chief economist with Ssangyong Investment Securities in Seoul.

Inflation would probably triple to 7.9%, by his calculations, while year-on-year GDP growth would slow to 5.8%, contrasted with a previous 2001 forecast of 6.5%.

Unlike Japan, where the public reaction over higher prices at the pump has been muted, South Korea has witnessed quite an outcry as residents of Seoul have watched the price of a gallon of gasoline rise to $4.44, about double what it was three years ago.

“Of course the Korean people are angry,” said Ssangyong’s Lee. “Compared with the U.S., our prices are much higher.”

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Asian Markets Sink Again

Asian stock markets are on track to post what will be, for most of them, the third decline in four years. How key market indexes have performed:

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Friday Pctg. change, in native currency Country/stock index close ’97 ’98 ’99 ‘00* South Korea/composite 553.25 -42% +50% +83% -46% Thailand/SET 274.14 -55 -5 +35 -43 Taiwan/weighted 6,612.09 +18 -22 +32 -22 Singapore/S. Times 1,932.99 -31 -8 +78 -22 Japan/Nikkei 225 15,818.25 -21 -9 +37 -16 Hong Kong/Hang Seng 14,612.88 -20 -6 +69 -14 Malaysia/composite 739.57 -52 -1 +39 -9 U.S./S&P; 500 1,448.72 +31 +27 +20 -1

*--*

* Through Friday

Sources: Bloomberg News, Reuters

*

Marshall reported from Hong Kong and Magnier from Tokyo. Hisako Ueno in the Times Tokyo bureau contributed to this report.