The oil price shock, a stronger US dollar and global emerging market volatility have led to an overall slide of Asian currencies by a magnitude that has so far remained rather limited, except for oil exporter Malaysia – with the ringgit down by 11% against the USD since September – but its strong fundamentals should allow resilience. In a region where most economies are hungry energy consumers, net oil importers and spend much on fuel subsidies, low oil prices have a net positive effect on the regional economy, especially for heavy oil users such as India and Indonesia.

Impact on country risk

The lower oil prices are having multiple positive effects on those two large economies, particularly in India, Asia’s highest net oil importer. The newly elected Indian PM Modi and Indonesian President Widodo are happy with tumbled oil prices as their government policy and reform plans should benefit from these. This is notably true regarding unpopular measures such as cutting heavy fuel subsidies (in Indonesia) or raising excise taxes on fuels (in India). Those recent decisions were necessary steps to reform the energy sector, rein in the budget deficit – especially in India – and support fiscal reforms aimed to finance future infrastructure and education spending. The positive impact is nevertheless mitigated by increased transport and electricity prices which could harm private consumption in the short term, a key growth driver in both countries. The oil price shock also helps tackling two major economic issues, namely high inflation and the current account deficit. In India, inflation has significantly eased from double-digit levels last year while the current account deficit strongly narrowed as oil accounts for over 40% of its total imports of goods. The gain is less explicit for Indonesia, where exports suffer from weaker commodity prices (notably palm oil and coal) and Chinese demand, whereas increased domestic fuel prices keep inflation high. Moreover, Indonesia is vulnerable to global risk aversion and capital outflows with a current account to remain in large deficit.
Further pressure on the rupiah is likely but risks are mitigated by currently comfortable foreign exchange reserves. All in all, in 2015, the lower oil price impact will be positive for both economies and currency risks contained by improved investor confidence provided the two leaders move forward in implementing much- needed reforms.

Analyst: Raphaël Cecchi,  r.cecchi@credendogroup.com