Slower Growth, Higher Prices or More Subsidies: Asia's Oil-Related Trilemma
BY :ORATHAI SRIRING AND ENRICO DELA CRUZ
MAY 26, 2018
Bangkok/Manila. Sujinda Cherdchai, who represents inter-regional bus operators in Thailand, told government officials this week that without any government support her industry has two options: higher fares or cutting services for some routes.
One day later, the government, faced with sluggish domestic demand and high household debt, said it will use money from the 30 billion baht ($933.7 million) state oil fund, which is separate from the central budget, to subsidize fuel prices.
"If retail oil prices rise 1 baht, the fund will help 0.50 baht," Energy Minister Siri Jirapongphan said on Tuesday (22/05).
A tough balancing act between scaling down business, passing some rising costs to consumers and government interventions through subsidies or excise duty cuts is taking place across Asia, which is by far the worst hit region by a surge in oil prices to around $80 per barrel, a level not seen since 2014.
Growth, budgets and inflation levels are at risk.
In the Philippines, which scrapped fuel subsidies and its own oil fund in 1998, companies seem to be already passing part of the costs to consumers.
Cebu Air Inc, operator of Cebu Pacific, says its oil price hedging strategy helped, but it still had to increase average fare prices by 10 percent in the first quarter after a 3.8 percent increase for the whole of 2017.
"Coupled with the weakening peso, the rise in fuel cost has seen our expenses increase by double-digits," said Charo Logarta-Lagamon, the airline's director for corporate communications, adding that half of the cost was transferred to customers.
Joe Zaldarriaga, spokesman of Manila Electric Company , the Philippines' largest power distributor also known as Meralco, says if oil prices stay at $80, the cost of the power it buys from its biggest supplier may rise 10 percent. This may be passed on to consumers, who already pay the highest electricity prices in the region, within a few months, he said.
In India, domestic demand has been weaker than in the Philippines after the implementation of a goods and services tax and the removal of large banknotes from circulation, and some companies are unable to raise prices.
Uday Wagh, who runs a taxi business in the western Maharashtra state, says he is already losing money due to advance bookings made when fuel was cheaper.
"We can’t pass higher prices to customers," Wagh said. "Business in summers is usually good due to weddings and school vacations, but this year it is subdued."
Economists say higher operational costs will eventually prompt companies to delay investment or trim activity. But the growth impact will take time to materialize.
"It's not like we can close flight [routes] or shorten the number of flights right away," an official from South Korea's Asiana Airlines said, asking not to be named as he was not authorized to speak to the media.
Governments Under Pressure
Unlike Thailand, which is enjoying a boom in tourism and runs a current account surplus, governments in India, Philippines and Indonesia have little room to help businesses and consumers. But the pressure is there.
This week, the Federation of Indian Chambers of Commerce and Industry demanded the government of Prime Minister Narendra Modi, who bids for re-election next year, cut excise duties on fuel as businesses were feeling the pinch.
The group's president, Rashesh Shah, acknowledged that for every rupee cut from excise duties, potential budget revenue losses could reach 0.1 percent of gross domestic product, but argued that otherwise for every $10 increase in oil prices, economic growth could slow 0.2-0.3 percentage points.
"While such a move will have an implication on the fiscal revenues at this juncture, there is a need to do the fine balancing act," Shah said.
On Monday, India's oil minister said he was looking at ways to keep prices in check, without giving details.
In Indonesia, where President Joko Widodo also runs for a new mandate next year, the government has pledged to keep electricity and diesel prices steady until 2019, with state-owned firm Pertamina shouldering the burden.
Elsewhere in Asia, companies that suffered during the 2014-2015 downturn in oil prices could now get back on the winning side. Singapore, where economic growth figures beat expectations on Thursday, could be among beneficiaries, although the recovery is likely to be gradual.
"There is growing optimism in the O&M [offshore and marine] industry underpinned by the rise in oil prices," Chris Ong, chief executive of the offshore and marine unit of Singaporean conglomerate Keppel, told Reuters.
"However, the drilling rig market continues to suffer from a supply overhang and will take some time before it fully recovers."
Another Singaporean company, Sembcorp Marine, which has cut jobs and other costs since the downturn, also said in an emailed statement the market faced oversupply but added it was now receiving "an encouraging pipeline of inquiries and tenders for innovative engineering solutions."