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‘Modest’ oil price decline impact on emerging markets

modest oil price decline impact on emerging markets - ‘Modest’ oil price decline impact on emerging markets

PLUNGING global oil prices could boost oil-dependent emerging economies like the Philippines and possibly serve as a “modest global offset” to the adverse impact of the coronavirus disease 2019 (Covid-19) outbreak, according to Oxford Economics.

“Under the current period of extreme uncertainty, the economic boost from a decline in oil prices will be modest,” the think tank said in a research note dated March 10.

Its simulations showed that the Philippines, along with China, India and Indonesia, are the economies expected to benefit the most if global oil prices drop to $30 per barrel in the second quarter and remain at these levels for the rest of the year, before recovery to $65 by end-2021.

“Of the larger economies considered here, those that benefit the most from the oil price decline are mainly Emerging Market oil-consumers such as China, India, and Indonesia. Advanced economies tend to use oil less intensively and so are less positively affected,” the report read.

According to its analysis, this scenario will likely boost the Philippine economy by less than 1% from baseline gross domestic product (GDP) levels in 2020-2021.

To assess the impact of oil price drop in selected economies, it conducted simulations of price changes across global transmission channels, taking into account “cross-country differences in fuel use, elasticity of demand, exchange rate changes and fuel taxes.”

“Predictably, the most adversely affected economies are oil exporters: Russia, Saudi Arabia, and UAE,” it added.

For global economic growth, Oxford Economics said the impact “averages +0.3% over 2020 and 2021, with a peak impact in 2021 of +0.4%,” “while global inflation would ease significantly, dipping 1.1 percentage point below baseline” this year.

The think tank said lower global oil prices could dampen prices but the $30 scenario would result in negative inflation for “14 out of 44 economies” this year.

“This prompts concerns that low inflation expectations could become entrenched,” it said.

Reuters reported that the price of Brent crude fell to $36.81 per barrel Wednesday, continuing a downtrend following a nearly 25% plunge on Monday to record lows.

Finance Undersecretary Gil S. Beltran has said that cheaper oil prices could pull down inflation moving forward.

Inflation eased to 2.6% in February on softer price increases of food, transport and utilities, from 2.9% in January. This brought year-to-date inflation to 2.8%, well within the central bank’s 2-4% target for the year.

Oxford Economics noted that “monetary authorities will find it difficult to respond to the negative demand shock as deflationary pressures mount” given that monetary policy easing is being eyed by many economies to offset the adverse impact of the outbreak.

The Bangko Sentral ng Pilipinas Monetary Board (MB) will meet for the second time this year on March 19,and is widely expected to deliver a 25-basis point (bps) reduction in policy rates.

On Feb. 6, the MB slashed benchmark interest rates by 25 bps.

Oxford Economics added: “A difficult global financial environment may undermine investment. Downgrades and defaults may lead energy producers to slash investment, which could spill over to other vulnerable pockets of the economy.” — Beatrice M. Laforga

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