Asia Currencies to Fall on Oil, Morgan Stanley Says

By Patricia Lui

July 31 (Bloomberg) -- Asian currencies have yet to feel the full force of the ``oil shock'' and will decline even if the price of crude falls to $100 per barrel, Morgan Stanley says. Record fuel import costs have sent the current-account balances of South Korea, India and Thailand into deficit, posing ``tremendous headwinds'' for the economies, said Stephen Jen, chief currency economist at Morgan Stanley in London. The impact on inflation and consumer spending has been limited because of fuel subsidies that aren't sustainable, he said.

``The biggest shock to Asia is not the U.S. housing crisis but the oil shock,'' Jen said in an interview. ``Asia was not built on $100 per barrel oil. Even if oil prices stabilize at $100, Asia will have a lot of work to do.''

Crude fell 15 cents to $126.62 a barrel as of 11:20 a.m. Singapore time on the New York Mercantile Exchange, 75 percent higher than a year ago.

Indonesia's rupiah, the Philippine peso and India's rupee will be ``first to go'' as these countries' governments are the least able to maintain subsidies, Jen said.

The rupiah will slide 2.6 percent to 9,367 per dollar this year, the peso 3.4 percent to 45.82, and the rupee 6.4 percent to 45.23, he predicts. South Korea's won will decline 6 percent to 1,076 a dollar and Malaysia's ringgit 3.5 percent to 3.38 per dollar, he added.

Crude prices this week fell to 12-week lows on speculation that global demand will wane as housing slumps and tighter credit curbs economic growth in the U.S. and Europe. Crude is down 14 percent from the record $147.27 reached July 11.

`Quite Immense'

``The negative terms of trade shock throughout Asia is quite immense, especially for Korea and Japan,'' Jen said.

South Korea posted current-account deficits for each of the six months through May and India reported deficits for the past four quarters. The current account tracks the flow of goods, services and investment income between an economy and its trading partners. China, Japan, South Korea and India are the four largest consumers of crude oil in Asia.

Fuel subsidies in China, India, Indonesia and Malaysia have merely delayed the effect of higher oil prices and these countries may not be able or willing to continue subsidies as costs escalate, Jen said. Malaysia's bill would balloon to 29 billion ringgit ($8.9 billion) should oil average $140 a barrel, from 8.8 billion ringgit in 2007, Domestic Trade and Consumer Affairs Minister Shahrir Samad said in an interview this week.

Fuel Subsidies

China plans to deregulate gasoline and diesel prices, with increases possible after the Olympics end next month, the China Daily reported two days ago. India, Indonesia, Malaysia and Vietnam have all raised prices of diesel and gasoline in the past two months to limit government spending on subsidies.

``Even countries which do not have subsidies are benefiting from their neighbors' subsidies as their trade partners are posting growth faster than they should be,'' Jen said.

Inflation may also trigger capital outflows as central banks are forced to raise interest rates, spurring investors to exit the stock market, Jen said. Central banks in India, Indonesia, the Philippines and Thailand have all raised key interest rates this month.

``Inflation forces central banks to react in ways that are not consistent with the oil shock,'' Jen said.

Overseas investors have sold $26.6 billion more of South Korean stocks than they have bought this year, according to data compiled by Bloomberg. In Japan, foreigners have sold a net $18.5 billion of shares and in India the figure is $6.7 billion.

Singapore and Taiwan's dollar will end the year little changed at $1.3700 and NT$30.05 per dollar, Jen said. China's yuan will gain to 6.6300 per dollar from 6.8272, he predicts.

`Four Camps'

Oil prices will affect Asia's current account-surpluses to varying degrees, creating ``four camps,'' said Peter Redward, head of research for emerging Asia at Barclays Plc in Singapore.

``The first camp are countries which are already running current-account deficits with oil prices at $100 per barrel and they are Korea and India,'' he said in an interview. ``As oil moves toward $140 to $160 per barrel, it becomes increasingly problematic for their currency markets.''

The second group of countries, Taiwan, the Philippines and Thailand, will manage to post current-account surpluses with $100 per barrel oil, which may turn to deficits as crude approaches $140, Redward said.

China, Hong Kong and Singapore are the third group, which have ``very large current-account surpluses'' that may shrink with oil at $140 per barrel ``but it still isn't really an issue for their currencies,'' he said.

Malaysian and Indonesia fall into the fourth category whose current accounts benefit from the rising energy and commodity prices, Redward said.

The won will decline to 1,023 to the dollar by the end of the year and the rupee will slip to 42.55 against the U.S. currency, according to the median in a Bloomberg survey of banks' currency forecasts.

To contact the report on this story: Patricia Lui in Singapore at plui4@bloomberg.net.