Update Country Report Maldives 09 Mar 2020

Event

Prices for Brent crude oil have fallen by almost a third to around US$30/barrel, after Saudi Arabia announced on March 7th that it would lower oil export prices and boost production after talks with other global oil producers broke down.

Analysis

The price slump will add to volatility in Asia's financial markets, but also offers some potential benefits for the region's larger economies, most of which are net oil importers. Lower fuel prices will free up household spending and help companies (such as those in logistics) for which fuel costs are a major expense. By depressing inflationary pressures, cheaper fuel could also increase space for monetary policy loosening. Such developments could be helpful for the region as it counters the impact of the coronavirus, but will have to be balanced against the deteriorating global economic picture.

If the price of oil remains at its current level (or below) for several months, China, India and Japan are among those best placed to benefit. The three are Asia's largest net importers, with China importing 464.5m tonnes of crude oil and 81.9m tonnes of petroleum products in 2018 (compared with combined exports of just 58.4m tonnes). China has tended to view low global oil prices as an opportunity to stockpile. The other major net oil importers in the region are Singapore, South Korea, Taiwan and Thailand. Lower oil prices also offer an opportunity for some countries to cut back on fuel subsidies, freeing up fiscal resources for more productive use, but in the current economic climate governments are unlikely to take this step.

Nevertheless, a sustained lowering of fuel costs will cut at the margins of Asia's national energy companies and affect their capital expenditure plans. As the region's net oil exporters, Malaysia, Brunei and Vietnam will also view the prospect of lower prices negatively, as they will weigh on fiscal revenue and limit their ability to implement stimulus policies to counteract the coronavirus. Indonesia has one of the larger oil sectors (as a share of GDP) in Asia, but remains a net oil importer.

Impact on the forecast

The substantial drop in oil prices will alter near-term inflationary dynamics and lead to cuts in our consumer and producer price inflation forecasts for 2020 for several countries in Asia. The GDP boost for net oil importers is likely to be offset by current financial market volatility, so we do not plan upwards revisions to our economic growth forecasts.