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Is Southeast Asia in a mini oil crisis? Political tensions and fuel hike – a bad mix?

Updated On: Mar 03, 2006

Amidst political tensions over President Arroyo’s fate, the Filipino annual consumer price index likely rose 8.0-8.5 percent in January, accelerating from a near six-year high of 7.9 percent in December.

That’s not the end of the bad news. Analysts said inflation would likely maintain its sharp rise through the early part of the year. This is likely to affect the Philippinessince it is an oil-importing country. Others cited an increase in the country's consumption tax and fuel price hikes as the main pushers for increases in consumer prices in the Philippines. Economists in the country however cannot predict if this will push the central bank to raise interest rates for the country.

The Philippines government have added VAT to previously exempted oil and electricity products simultaneous with the oil companies’ decision to increase fuel prices to be on par with global levels. The Philippines like almost all other Southeast Asian countries closely take their cue from US leadership in oil prices and interest rates. This time, it is no different as the Filipino Central Bank watches US decision on interest rates. An increase in the US Federal Fund rate will prompt the Philippines to follow suit.

Malaysian government’s decision on a 30-sen hike in fuel prices caught many Malaysians by surprise.  To fight off criticisms of accumulated surplus in the estimated RM4.4 billion (US$1.2 billion) savings this year from fuel subsidy following the 30 sen rise in fuel prices, the Prime Minister announced that the surplus will be used for “national development…” to improve the public transportation sector…in the interests of the people”. Despite protestations domestically, the PM argued that fuel prices in the country were still low compared to other ASEAN nations except Brunei.  DPM Najib also went on TV to give a long explanation on the rationale behind the fuel hike.  The hike is inevitable as high global prices have forced the government to lessen subsidies for fuel and there is the fact that Malaysia, despite producing oil, is still overall a net oil importing country.

Still the oil price hike is not without controversy as pump prices jump by 23%.  This is followed by rumblings of concerns about further inflation. The opposition parties have taken up this issue as one of contention.

Even the new ASEAN nations have not been spared the hikes. To increase profits for electricity providers and to stop power cuts, Vietnam is also considering increasing electricity rates for 2006-10.  The Vietnamese Industry Ministry study group proposed an average increase of 8.8% in electricity rates. Three groups of electricity users will however be protected initially from this hike: industrial producers, electricity wholesalers in rural areas, and low-income family who use less than 100 kWh per month. Critics have already come up to say that sheltering these selected sectors would place unequal burden on the industrial sector. Similarly inThailand, the state electricity regulator approved an adjustment tariff charge for the period of Feb 06 to May 06 at Bt 0.76 per Kilowatt-hour, an increase of 33% previously. Analysts however predict that Consumer Pricing Index (CPI) will probably not be adversely affected because utilities account for only 5.1% in CPI.

It remains to be seen how the rise of China and India will impact on the regional energy prices and consumption. But such trends indicate that ASEAN may need to have some working cooperation in energy. So far, the most detailed plan for a regional energy cooperation has been proposed by Japan but thwarted by its own political problems with South Korea and China. It may not be realistic to put in place a plan within ASEAN unless there are specific agreements from the big oil consumers in the region and their cooperation is guaranteed.

Sources:

Vietnam mulls electricity hikes (Thanh Nien, Tuoi Tre, Feb 28)

Thailand’s Energy Sector Rising Ft has Little Impact on CPI (KGI Securities, Feb 21)

Philippines Feb CPI likely up 6.5-7.7 pct on tax, oil price hikes (AFX Asia, March 1)

Malaysia to use savings from fuel subsidy for development: PM (Asia Pulse, March 1)

Malaysians surprised by record fuel price hike; Pump prices rise by more than 20% as government warns against profiteering (ST, March 1)

Jan CPI seen up 8.0-8.5% on rising energy, food prices (Inq 7, Feb 1)

(http://money.inq7.net/breakingnews/view_breakingnews.php?yyyy=2005&mon=02&dd=01&file=14)