Poor sentiment masks benefits of cheaper oil to economy

Singapore - AMID all the negative news, it's worth remembering that falling oil prices are actually a boon for the Singapore economy. But the positive effects have not been fully registered this time around - mainly because the tumble has happened alongside intense market volatility and uncertainty.

Singapore, as a net oil importer - meaning it imports more oil than it exports - stands to benefit directly from lower oil prices. Numerous analyses have shown this; just last year, Oxford Economics had forecast that Singapore's GDP would be 0.4 percentage point higher if oil prices were to drop to US$40 (S$57) a barrel from US$84.

But drawing such a conclusion is difficult this time, given the extent of alarm permeating through financial markets.

As CIMB Private Banking economist Song Seng Wun put it: "On balance, being a net oil or energy importer, lower oil prices should be net positive for Singapore on a macro level ... But that's not necessarily true (when) people are in 'fearful mode'. Sentiment has a lot to do with it - rather than be cheered by the lower cost of energy, we become fearful that lower prices are actually a reflection of the global economy grinding to a halt."

Added Mizuho economist Vishnu Varathan: "The correlation between oil and equities has been phenomenal, almost shameful, actually. I mean, these guys are not supposed to go hand and club - they're different asset classes, companies are supposed to be benefiting. But none of this has held. Not only is oil being sold off; everything is taking a hit as well." Mr Song believes an element of 'self-fulfilling prophecy' is at play here. "Not much has changed in terms of fundamentals for oil prices to tank from US$50 to US$40 to now below US$30 ... So it must be speculation that's adding to it and making it worse."

Economists also pointed out how the precipitous drop in oil prices has upped the stakes for businesses, making the operating environment even more challenging.

Said Mr Varathan: "People who run these regressions (to calculate the impact of lower oil prices on GDP) are usually testing for a very linear and incremental drop over time - they're not looking for a 70 per cent plunge which is also going to kill a lot of businesses. It's not just about the volatility, but also the depth of the movement. That has wiped out a lot of the oil-related industries."

Indeed, with the oil slump showing no signs of recovery, oil majors - which have a sizeable presence in Singapore - are again slashing spending, selling assets, cutting jobs, and delaying projects. According to Rystad Energy, global oil and gas investments are expected to fall to their lowest in six years in 2016 to US$522 billion. This follows an already-severe 22 per cent fall to US$595 billion in 2015.

That, in turn, has had significant implications up and down the entire supply chain in Singapore, with offshore and marine firms especially feeling the strain. With fewer construction contracts to go round, revenues continue to be squeezed and margins thinned.

Bank of America Merrill Lynch economist Chua Hak Bin also flagged the knock-on pain experienced by the banking and finance sector, given increasing worries over bank loans to oil- and commodity-related companies.

Still, it's not all doom and gloom. Businesses outside of the oil and gas sector have on the whole benefited from lower utility and fuel-related costs. For example, those in the chemicals sector have seen some easing in their cost-side pressures. Airline and shipping companies have rejoiced at cheaper fuel, too; some have even cut prices to entice more consumers to travel.

Said UOB economist Francis Tan: "If airlines are aggressively cutting and no one is biting, that would be scary. But that's not the case right now - at least this shows that Singaporeans are still travelling and discretionary spending is still happening. So the underlying demand is still okay."

Inflationary pressures have come off as well, thanks to a mix of budgetary and administrative measures, coupled with lower energy prices. On Monday, the Department of Statistics said inflation eased to -0.5 per cent in 2015 - marking Singapore's first full-year negative inflation since 2002 (-0.4 per cent) and also the lowest in 29 years (1986: -1.4 per cent).

With the Monetary Authority of Singapore (MAS) indicating that it will be watching volatile oil prices closely, economists now believe the central bank could ease its Singapore dollar policy - although it is not their base case for now.

That is because it is tough to get clarity on the domestic inflation outlook - and hence, MAS' likely policy action. Said DBS economist Irvin Seah: "Much depends on the outlook for oil going forward, which is hard to call. I don't think anyone dares to make calls with conviction now - especially not after all the mistakes that were made last year."

kellytay@sph.com.sg

This article was first published on January 27, 2016.
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