Pacific Money

What Does ASEAN Think About OPEC’s Cuts?

Signs indicate that it is too early for optimism.

Stock markets in ASEAN rallied after OPEC members agreed on November 30 to cut oil production for the first time in eight years. Members of OPEC agreed to reduce output by 1.2 million barrels a day by January, bringing the bloc’s combined daily output to 32.5 million barrels. Despite comprising of predominantly oil-importing economies, rising oil prices are a mixed bag for ASEAN countries.

On the stock market front, the SGX rose almost 1 percent, posting a four-month high. One week after the announcement, Singapore shares are still going strong. Indonesian shares closed almost 1 percent higher. Oil and gas stocks of companies such as rig builders Keppel Corp climbed almost 9 percent. Nevertheless, the stock market’s optimism is not always reflected in individual economies.

No country has reacted as strongly to this announcement as Indonesia. According to Indonesia’s minister of energy and mineral resources, “cutting production capacity is not beneficial for Indonesia.” Having recently rejoined OPEC after a seven-year absence, Indonesia promptly suspended its membership after the meeting, citing disagreements with OPEC’s proposal to reduce Indonesia’s oil production by 5 percent. Despite being ASEAN’s largest oil producer, Indonesia’s oil revenues have been declining as a percentage of contribution to state revenue, from 25 percent in 2006, to an expected 3.4 percent in 2016. Furthermore, as a net oil importer, rising oil prices could increase inflation and dampen consumer spending, which has thus far contributed to Indonesia’s strong economic run.

For ASEAN’s other growth hotspot, Vietnam, Vietnamese officials are confident that the rise in oil prices will not adversely impact the economy, at least in the short term. Vietnam’s Tuoi Tre newspaper reported a high-ranking employee from Petrolimex, Vietnam’s largest fuel wholesaler, predicting that oil prices are likely to remain relatively stable. An official from the Ministry of Finance told Tuoi Tre that the 2017 budget was prepared under the assumption that oil prices would be $50 a barrel. Vietnamese industry watchers are confident that global oil prices will not reach $55 a barrel.  State revenues would not be unduly affected by global prices.

For Singapore, news of rising oil prices will bring some light to Singapore’s slow growing economy as it hopes to avoid a technical recession. The hope is that higher oil prices will revive Singapore’s struggling marine offshore industry, which has been hit by a drastic fall in project orders resulting from low oil prices. This in turn will help Singaporean banks that have been struggling with non-performing oil loans.

The impact that cuts in oil production will have on Southeast Asian economies is very much dependent on the extent of the rebound in oil prices. Countries will also be waiting to see if OPEC can maintain its self-imposed quota, given its poor history of self-regulation. As countries watch and wait for the dust to settle, the devil it seems, will be in the details.