Macroscope | How a stronger US dollar and higher crude prices are a recipe for trouble in oil-importing Asian nations
Neal Kimberley says US sanctions on Iran are driving up oil prices for Asian countries with weaker currencies. China and Hong Kong should be able to cope, but India and Indonesia are already suffering
Higher oil prices and tighter American monetary conditions are an unwelcome combination for energy importers in Asia. China and Hong Kong may be better placed than others to cope but for many in Asia it will prove a distinctly uncomfortable economic experience with consequences that may even affect local politics.
The mechanics of the situation are quite straightforward. To the extent that tighter monetary policy settings in the United States lend themselves to a stronger US dollar, other currencies will weaken against the greenback. As oil is priced in US dollars, even if the price of a barrel of crude remains unchanged in greenbacks, it increases in local currency terms as the US currency rises on the foreign exchange market. If the oil price also rises in US dollar terms, the problem is compounded.
In Hong Kong’s case, the dollar peg limits how far the local currency can fall versus the US dollar. In the current scenario, if the exchange rate is 7.82 per US dollar and oil is US$80 a barrel, the cost of a barrel in local currency terms is HK$625.60. But at 7.84, with an unchanged crude price, the cost would rise to HK$627.20.
And if the price of a barrel of oil rises in US dollar terms while the greenback makes gains on the currency markets, the impact in local currency terms is amplified. If the oil price rises to US$85 a barrel while the exchange rate moves to 7.84, then the cost of a barrel in local currency terms surges to HK$666.40.
Parts of Asia, notably India and Indonesia, are already feeling the effects of the double whammy of higher US dollar-denominated energy prices and a weaker local currency.
Indonesia’s rupiah has fallen to more than 15,000 to the US dollar from 13,500 at the start of 2018, even as the rising oil price has pushed up Indonesia’s oil import costs in rupiah terms.
As for India, a falling rupee and rising oil price are igniting a farm crisis. This year, Indian farmers have seen an increase of over 25 per cent in the price of the diesel that fuels their tractors. It adds to the burden on a sector that is already struggling with higher fertiliser prices and strong harvests that are lowering crop prices.
