Lower oil prices may ease Singapore's inflation

Lower oil prices may ease Singapore's inflation
PHOTO: Lower oil prices may ease Singapore's inflation

SINGAPORE - The plunge in oil prices is roiling global markets but Singapore's economy may end up reaping some benefits.

Economists say a sustained lower oil price would help bring down Singapore's inflation this year and could even give a small lift to economic growth.

Crude prices have dropped nearly 10 per cent this month amid disappointing economic data from China and the United States, the world's biggest oil consumers.

On Tuesday, it slipped below US$100 (S$123.43) a barrel for the first time in 10 months, and fell further on Wednesday to below US$99 a barrel.

Crude staying under US$100 a barrel for the rest of the year could shave up to 0.5 percentage point off inflation in Singapore, which is a net importer of oil, says Credit Suisse economist Santitarn Sathirathai.

OCBC economist Selena Ling agrees, noting that a sustained drop in prices will lead to cheaper electricity, which reduces fuel and utility bills, as well as cheaper petroleum and transport costs.

The indirect impact could be even larger if firms pass on their savings on energy to consumers in the form of cheaper food and other services, said Citi economist Kit Wei Zheng.

However, he cautioned that any impact may come with a lag - electricity tariffs are adjusted only quarterly, for example - or could be blunted by other factors like a stronger Singapore dollar.

To the extent that consumers and companies do save on oil-related costs, they will have more to spend, which may in turn boost economic growth.

Based on Mr Sathirathai's calculations, lower oil prices could add 0.1 percentage point to Singapore's economic growth for 2013.

The official forecast for economic growth this year is 1 to 3 per cent, so a 0.1 percentage point hike would mean 3 to 10 per cent of extra growth for Singapore.

Ms Ling and Mr Kit, however, are more circumspect on the effect of low crude prices on Singapore's growth.

While falling oil prices ease cost pressures, the current drop is partly due to weak global demand, which is also crimping Singapore's trade-dependent economy, noted Ms Ling.

In addition, Singapore is part of the global oil supply chain, and its economic activities such as oil refining and rig building could be hurt by a fall in the demand for crude, said Mr Kit.

Finally, oil prices may not manage to stay low for the whole year.

"The moment there is any sign of a sustained broad-based global recovery, prices for energy will surely recover in line," said CIMB economist Song Seng Wun.

fiochan@sph.com.sg


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