Other major Asian economies are weathering but not fully decouple from the slowdown of industrialized economies. Recent indicators indicated that export quantities slowed down in some Asian NIEs, ASEAN-4 economies and notably India and China, in particular exports to industrialized countries and thus domestic demand and intraregional trades are likely to play more significant roles in driving growth. However, the inflationary pressures have escalated across countries and are likely to slash domestic spending. Therefore, growths in major Asian economies are likely to slowdown in 2008, led by China and India which are expected to grow at the rate of 9.3 and 7.9 percent, down from 11.4 and 9.2 percent in 2007. Asian NIEs and ASEAN-5 are likely to slowdown to 4.0 percent and 5.8 percent, from 5.6 percent and 6.3 percent in 2007 respectively.
Oil price in 2008
During the first five months of 2008, oil prices increased substantially as a result of tight market condition and a continued depreciation of U.S dollar that encourages hedging and speculation against the further depreciated value of USD. Over the upcoming months, oil prices are likely to continue its upward trend. Given that oil market condition will remain tight while there is possibility that US dollar will continue on its downward trend, these developments will give investors and also speculators more incentive to reallocate their portfolios toward oil and other commodities to guarantee their investment return and hedge against risks. In addition, the persistence of high oil prices could additionally heated by political tension in several oil producing countries such as Nigeria and Argentina. An increase in oil demand from OECD countries in order to replenish their declining stocks over the past months is also in favour of further rises in oil prices. World oil demand will also likely to grow faster, particularly in the emerging economies such as China, India, and oil-exporting countries. The average of Dubai crude oil price in 2008 is project to be around 110-120 U.S. dollars per barrel, much higher than the average of 68.83 U.S. dollars in 2007. Underlying factors for expected surge in oil price in 2008 are as follows:
(1) World oil demand has continued to grow. The International Energy Agency (IEA) forecasted that the global oil demand will be 87.2 million barrels per day, with the increase of 1.3 million barrels per day from 2007 (or increase by 1.5 percent). The oil demand growth will outpace the supply growth. The oil supply in 2008 is expected to be 86.68 million barrels per day, increase by 1.38 percent. As suggested by the forecast, the level of oil production will be fall short of the projected oil consumption by 0.52 million barrels per day. Especially, high oil demand in emerging economies will continue to be the main drivers of the growth in global oil demand. For example, oil demand in china in 2008 is expected to be 7.89 million barrels per day, increase from 2007 by 4.7 percent, partly from the increase of oil import to support the Olympic in August. Oil demand in Non - OECD Asia will be 18 million barrels per day, increase from 2007 by 7.27 percent. Oil demand in Middle-East countries in 2008 will be 7 million barrels per day, increase from 2007 by 6.1 percent. The increase of their production will only to cater their own demand, if the further production increase is agreed upon.
Barrel/Day 2005 2006 2007 ------------------ 2008 ---------------
Year Q1 Q2f Q3f Q4f Year
Quantity 84.6 85.3 84.66 86.08 86.79 87.41 86.71 86.68
Non-OPEC 50.4 51.1 49.24 49.17 49.49 50.05 50.59 49.83
OPEC Crude oil 29.7 29.7 35.43 32.28 32.59 32.22 31.1 32.05
NGL 4.5 4.6 4.53 4.62 4.71 4.86 5.01 4.8
Supply-Demand 0.7 0.6 -1.34 -1.22 0.49 0.51 -1.69 -0.52
Source: EIA
(2) The U.S dollar looks set to move on the depreciating trend. Underlying factors for the depreciation will be the continued slowdown in the US economy and further emergence of damages in financial sectors. This will induce the Hedge Funds and institutional investors to diversify portfolios from debt instruments denominated in U.S. dollar to future markets of commodities such as future markets of oil,steel, gold and agricultural products. Moreover, the depreciation will induce an attempt by oil exporting countries to maintain oil price at high level in order to compensate for revenue reduction in terms of local currency.
(3) Weather tends to fluctuate. Global Warming will force the climate and weather to fluctuate while the natural disaster will be more frequent and more severe, if happen. These factors will directly affect the world crude oil production, particularly in the second and third quarters which are rainy seasons. Hurricanes and other natural disasters in the America and Africa, if occur, will cause the refinery to be temporarily closed and cause oil prices to rise.
Factors determine the oil prices over the upcoming periods
Upside risk factors consist of:
1. Commercial stock of many countries especially OECDs have been declined while spare capacity remains low
2. Higher cost of production due to the lack of labor and refineries from unconventional sources
3. Global oil demand continue to grow which is partly due to price subsidy in several countries
4. U.S. dollars depreciation
5. Speculation
6. Hedging
Spike risk factors consist of:
1. Climate changes/weather
2. Political unrest in oil producing countries, and geopolitics
Downside risk factors:
1. World and US economic slowdown
2. Period of refinery maintenance has passed
3. Increase in oil production from non-OPEC countries
4. Slowdown in demand during autumn (prior to driving season)
"...In the first half of 2008 upside risks and spike risks have been more pronounced than the download risks which are expected to be stronger forces in the latter half, especially in the situation of global economic slowdown..."
A phenomenon of rice price in Asian
The sharply increase in rice price has become an important issue in Asia as its role is both rice producer and rice consumer. According to consumption baskets that were compiled across the region, rice accounts for 60-70 percent of cereal consumption. Therefore, the recent increase in rice price has caught investor’s attention.
1) The key determination factors for the increase in rice price
The key factors behind the surge in price of grains and rice are as the follows:
- Supply shock: World rice production has decreased since 2007 and continued into 2008 due to bad weather condition. In particular, drought in Europe in late of 2007, drought in Australia and, flooding and freezing weather in China in early 2008.
- Supply substitution: Grains in general have been competing for production resources with other crop and manufacturing productions.
- Demand substitution: The increase in rice price was partially attributable to the increase in demand for energy crop which could lead to production substitution in the long run.
- Cost pressures: Rising cost of oil, gas and other inputs (included fertilizers, fuel for farm machinery and farm machinery) raised production costs of rice and reduced profits. This situation restrained production expansion. Combined with the increase in demand for energy crop, it leads to production substitution which scarified rice production for energy crop production.
- Speculation: Concern over long term supply fluctuation resulted in higher stock accumulation and market speculation on rice price.
These factors raised concerns over supply shortage and resulted in export restriction in major exporting countries such as Egypt, India and Vietnam and thus drove rice price in the world market.
2) Trend of rice price
In the medium term, output of agricultural production in the next harvesting season is expected to increase in Brazil, Uruguay, Bangladesh, India, Indonesia and Thailand. To some extents, the increase in output is expected to reduce price pressures. According to the report by FAO, in 2008-2009, output from major rice and wheat exporting countries is likely to increase. This development will reduce price pressures. However, some other factors are likely to drive rice price in long run to increase further, in particular, the increase in oil prices and supply side factors such as land water and energy. Theses factors will stronger affect agricultural production than other sectors. Thus cost management and production adjustment to changing environments are important issues.
As food prices increases, the reduction in consumption is unlikely large. Therefore, foods prices are likely to increase sufficiently to induce production resources from other sectors. This situation will help maintain foods production but also requires the improvement in production technology. Otherwise it would lead to misallocation of production resources to low productive sectors. Therefore, the important issues in the near term are including (i) the change in food and agricultural prices in relative to other commodities and (ii) income transfers from food consumers to food producer both in domestic economy and in foreign countries.
3) Impacts on the economy
The emergences of food price inflation in Asian countries are mostly driven by the increase in prices of other commodities such as meat, fruits and vegetables rather than cereals or grain. However, over the past 6-9 months, food price inflation was higher than average inflation. In the case of Thailand, an average inflation rate rose sharply due to the increased of oil and food prices at an accelerate rate in the first quarter.
Food price inflation erodes household purchasing power. However, its impacts vary across different group of people.
- The impacts on low-income households are greater than that of high-income households. This is attributable to the fact that the ratio of food consumption in total consumption basket is higher for household with low-income than that of high-income households. In the case of Thailand, this ratio is higher for lowincome group than that of country average. In addition, food price faced by rural households are usually rise faster than that faced by urban households due to embodied transportation costs in food prices.
- As Thailand and Vietnam are food exporting country, they are beneficial from incomes transfer (from food importing countries) which is generated by food prices increase. Meanwhile, Philippines, Malaysia, Indonesia, Hong Kong, Singapore, Taiwan and Korea are negatively affected as they are food importing country and their trade balance for food items was in deficit last year. Classified by income level, however, Hong Kong, Singapore, Taiwan and Korea are high income country. Therefore the impacts of high food prices are unlikely to generate social problems. However, with lower income percapita, the impacts on Philippines should be relatively strong.
--National Economic and Social Development Board--
-PM-
Oil price in 2008
During the first five months of 2008, oil prices increased substantially as a result of tight market condition and a continued depreciation of U.S dollar that encourages hedging and speculation against the further depreciated value of USD. Over the upcoming months, oil prices are likely to continue its upward trend. Given that oil market condition will remain tight while there is possibility that US dollar will continue on its downward trend, these developments will give investors and also speculators more incentive to reallocate their portfolios toward oil and other commodities to guarantee their investment return and hedge against risks. In addition, the persistence of high oil prices could additionally heated by political tension in several oil producing countries such as Nigeria and Argentina. An increase in oil demand from OECD countries in order to replenish their declining stocks over the past months is also in favour of further rises in oil prices. World oil demand will also likely to grow faster, particularly in the emerging economies such as China, India, and oil-exporting countries. The average of Dubai crude oil price in 2008 is project to be around 110-120 U.S. dollars per barrel, much higher than the average of 68.83 U.S. dollars in 2007. Underlying factors for expected surge in oil price in 2008 are as follows:
(1) World oil demand has continued to grow. The International Energy Agency (IEA) forecasted that the global oil demand will be 87.2 million barrels per day, with the increase of 1.3 million barrels per day from 2007 (or increase by 1.5 percent). The oil demand growth will outpace the supply growth. The oil supply in 2008 is expected to be 86.68 million barrels per day, increase by 1.38 percent. As suggested by the forecast, the level of oil production will be fall short of the projected oil consumption by 0.52 million barrels per day. Especially, high oil demand in emerging economies will continue to be the main drivers of the growth in global oil demand. For example, oil demand in china in 2008 is expected to be 7.89 million barrels per day, increase from 2007 by 4.7 percent, partly from the increase of oil import to support the Olympic in August. Oil demand in Non - OECD Asia will be 18 million barrels per day, increase from 2007 by 7.27 percent. Oil demand in Middle-East countries in 2008 will be 7 million barrels per day, increase from 2007 by 6.1 percent. The increase of their production will only to cater their own demand, if the further production increase is agreed upon.
Barrel/Day 2005 2006 2007 ------------------ 2008 ---------------
Year Q1 Q2f Q3f Q4f Year
Quantity 84.6 85.3 84.66 86.08 86.79 87.41 86.71 86.68
Non-OPEC 50.4 51.1 49.24 49.17 49.49 50.05 50.59 49.83
OPEC Crude oil 29.7 29.7 35.43 32.28 32.59 32.22 31.1 32.05
NGL 4.5 4.6 4.53 4.62 4.71 4.86 5.01 4.8
Supply-Demand 0.7 0.6 -1.34 -1.22 0.49 0.51 -1.69 -0.52
Source: EIA
(2) The U.S dollar looks set to move on the depreciating trend. Underlying factors for the depreciation will be the continued slowdown in the US economy and further emergence of damages in financial sectors. This will induce the Hedge Funds and institutional investors to diversify portfolios from debt instruments denominated in U.S. dollar to future markets of commodities such as future markets of oil,steel, gold and agricultural products. Moreover, the depreciation will induce an attempt by oil exporting countries to maintain oil price at high level in order to compensate for revenue reduction in terms of local currency.
(3) Weather tends to fluctuate. Global Warming will force the climate and weather to fluctuate while the natural disaster will be more frequent and more severe, if happen. These factors will directly affect the world crude oil production, particularly in the second and third quarters which are rainy seasons. Hurricanes and other natural disasters in the America and Africa, if occur, will cause the refinery to be temporarily closed and cause oil prices to rise.
Factors determine the oil prices over the upcoming periods
Upside risk factors consist of:
1. Commercial stock of many countries especially OECDs have been declined while spare capacity remains low
2. Higher cost of production due to the lack of labor and refineries from unconventional sources
3. Global oil demand continue to grow which is partly due to price subsidy in several countries
4. U.S. dollars depreciation
5. Speculation
6. Hedging
Spike risk factors consist of:
1. Climate changes/weather
2. Political unrest in oil producing countries, and geopolitics
Downside risk factors:
1. World and US economic slowdown
2. Period of refinery maintenance has passed
3. Increase in oil production from non-OPEC countries
4. Slowdown in demand during autumn (prior to driving season)
"...In the first half of 2008 upside risks and spike risks have been more pronounced than the download risks which are expected to be stronger forces in the latter half, especially in the situation of global economic slowdown..."
A phenomenon of rice price in Asian
The sharply increase in rice price has become an important issue in Asia as its role is both rice producer and rice consumer. According to consumption baskets that were compiled across the region, rice accounts for 60-70 percent of cereal consumption. Therefore, the recent increase in rice price has caught investor’s attention.
1) The key determination factors for the increase in rice price
The key factors behind the surge in price of grains and rice are as the follows:
- Supply shock: World rice production has decreased since 2007 and continued into 2008 due to bad weather condition. In particular, drought in Europe in late of 2007, drought in Australia and, flooding and freezing weather in China in early 2008.
- Supply substitution: Grains in general have been competing for production resources with other crop and manufacturing productions.
- Demand substitution: The increase in rice price was partially attributable to the increase in demand for energy crop which could lead to production substitution in the long run.
- Cost pressures: Rising cost of oil, gas and other inputs (included fertilizers, fuel for farm machinery and farm machinery) raised production costs of rice and reduced profits. This situation restrained production expansion. Combined with the increase in demand for energy crop, it leads to production substitution which scarified rice production for energy crop production.
- Speculation: Concern over long term supply fluctuation resulted in higher stock accumulation and market speculation on rice price.
These factors raised concerns over supply shortage and resulted in export restriction in major exporting countries such as Egypt, India and Vietnam and thus drove rice price in the world market.
2) Trend of rice price
In the medium term, output of agricultural production in the next harvesting season is expected to increase in Brazil, Uruguay, Bangladesh, India, Indonesia and Thailand. To some extents, the increase in output is expected to reduce price pressures. According to the report by FAO, in 2008-2009, output from major rice and wheat exporting countries is likely to increase. This development will reduce price pressures. However, some other factors are likely to drive rice price in long run to increase further, in particular, the increase in oil prices and supply side factors such as land water and energy. Theses factors will stronger affect agricultural production than other sectors. Thus cost management and production adjustment to changing environments are important issues.
As food prices increases, the reduction in consumption is unlikely large. Therefore, foods prices are likely to increase sufficiently to induce production resources from other sectors. This situation will help maintain foods production but also requires the improvement in production technology. Otherwise it would lead to misallocation of production resources to low productive sectors. Therefore, the important issues in the near term are including (i) the change in food and agricultural prices in relative to other commodities and (ii) income transfers from food consumers to food producer both in domestic economy and in foreign countries.
3) Impacts on the economy
The emergences of food price inflation in Asian countries are mostly driven by the increase in prices of other commodities such as meat, fruits and vegetables rather than cereals or grain. However, over the past 6-9 months, food price inflation was higher than average inflation. In the case of Thailand, an average inflation rate rose sharply due to the increased of oil and food prices at an accelerate rate in the first quarter.
Food price inflation erodes household purchasing power. However, its impacts vary across different group of people.
- The impacts on low-income households are greater than that of high-income households. This is attributable to the fact that the ratio of food consumption in total consumption basket is higher for household with low-income than that of high-income households. In the case of Thailand, this ratio is higher for lowincome group than that of country average. In addition, food price faced by rural households are usually rise faster than that faced by urban households due to embodied transportation costs in food prices.
- As Thailand and Vietnam are food exporting country, they are beneficial from incomes transfer (from food importing countries) which is generated by food prices increase. Meanwhile, Philippines, Malaysia, Indonesia, Hong Kong, Singapore, Taiwan and Korea are negatively affected as they are food importing country and their trade balance for food items was in deficit last year. Classified by income level, however, Hong Kong, Singapore, Taiwan and Korea are high income country. Therefore the impacts of high food prices are unlikely to generate social problems. However, with lower income percapita, the impacts on Philippines should be relatively strong.
--National Economic and Social Development Board--
-PM-