Plunging oil prices: 4 reasons it's bad news

Plunging oil prices: 4 reasons it's bad news

Oil prices have been in steady decline for the past two years, and touched US$28 a barrel earlier this week. Good news? Not for everybody in Asia.

1. PITY THE FOREIGN WORKER...

Families in many parts of Asia depend on remittances from the Middle East sent home by kinfolk who have travelled to countries like Saudi Arabia, the United Arab Emirates, Kuwait and Bahrain to work on construction sites, hotels, banks and various other jobs that locals in the region will not touch.

As long as oil stayed above US$50-US$55 a barrel, these nations could largely absorb the impact of dropping crude prices and maintain spending on infrastructure and other projects.

However, many are being forced to re-look their budgets with the price more than halving from that point. This means a cutback in spending that will impact on businesses, leading to layoffs.

With most nations, understandably, shedding overseas labour before turning on their own citizens, these remittances are set to fall.

2. ESPECIALLY IF THE WORKER'S FROM INDIA, CHINA OR THE PHILIPPINES

In Asia, India and China are the biggest recipients of such remittances, at US$70 billion (S$100.6 billion) and US$60 billion, respectively.

These two big nations are followed by the Philippines, which receives about US$26 billion annually from such flows.

Other Asian nations like Pakistan, Sri Lanka, Myanmar and Nepal, also receive significant remittances. In Nepal's case, this amounts to nearly a fifth of the economy.

3. BUT THE IMPACT WILL BE UNEVEN

Relative to the size of its economy, currently estimated at about US$390 billion, the US$26 billion the Philippines receives by way of remittances is a big deal for the country.

So, even though the US is its No. 1 source of remittances - think of all those Filipino emigres spreading out from Hawaii towards the mainland US states like California and further east - a drop in flows from the Gulf is terrible for thousands of families.

For the same reason, India, the top recipient of remittance flows, will be relatively less affected. Even if the Gulf accounts for half of the US$70 billion it receives every year, and this should drop by 20 per cent, the impact on its US$2.2 trillion economy will be only US$7 billion.

Yet, that is not the full picture.

In some parts of India, particularly in the southern state of Kerala, every second family in the state, it is said, has a relative in the Gulf states, driven there by the lack of employment opportunities at home.

Of the nearly seven million Indians in the Gulf, about two million are from Kerala alone. Hence, the impact will be disproportionately huge on Kerala, even as the rest of India may shrug it off.

4. MORE BAD NEWS ON THE WAY?

When will other Asian states start feeling the impact? Very soon, from the looks of it.

Oman has told its refiners to get rid of foreign staff before they start trimming locals.

This week, in Dubai, the vice-chairman of its biggest bank and No. 1 landlord told the city's developers that it is time for them to rethink their budgets.

"Those who are mindful of the reality around them will manage, but those who stretch themselves with billions worth of projects won't," said Mr Hesham Al Qassim, chief executive officer of the state's Wasl Asset Management and vice-chairman of Dubai's largest lender, Emirates NBD.

Time then to be careful with spending that money sent from your relatives in the Gulf.

Some of them may be coming home sooner than you might have expected.


This article was first published on Jan 19, 2016.
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