Singapore will benefit from cheaper oil: Analysts

But prospect of falling prices could prompt MAS to let Singdollar weaken

This article was first published on Jan 13, 2015

Singapore will be a big winner from cheaper oil although the central bank may have to let the currency weaken if inflation sinks too low, analysts said yesterday.

Oxford Economics said in a recent report that the economy here would likely grow at a slightly faster pace while the trade balance would improve significantly if crude oil falls to US$40 (S$53) a barrel.

The Philippines and Taiwan would also be likely beneficiaries of such a drop, it added.

The British-based group forecast that Singapore's gross domestic product (GDP) would grow around 3.7 per cent this year and next year if oil prices drop to US$40 a barrel.

That prediction is 0.4 percentage point higher than the 3.3 per cent GDP growth the analysts expect in the baseline scenario, which is if oil prices were to average US$84 per barrel this year, then gradually climb to US$109 per barrel in 2019.

The local economy grew 2.8 per cent last year and the Government expects it to grow 2 per cent to 4 per cent this year.

Oxford Economics tips that Singapore's current account would also improve markedly in the wake of cheaper crude.

A nation's current account, a gauge of its trade, is its exports of goods, services and transfers, minus its imports of them. A current account surplus is usually better than a deficit.

If oil prices fall to US$40, the current account here could grow from the baseline scenario's 18 per cent to as large as 22.8 per cent of GDP, the analysts noted.

That would be the largest projected percentage across the 45 major economies the analysts looked at.

Apart from Singapore, the Philippines and Taiwan would also be among the biggest winners in the region.

The Philippines would likely become the fastest-growing major economy in the world if oil prices were to slide further, the analysts said, predicting that the country's GDP could expand 7.6 per cent on average over this and next year.

It would outshine even China, for which the analysts predicted 7.1 per cent GDP growth from 2015 to 2016 should oil prices hit US$40 a barrel.

Taiwan would also benefit from a bigger current account surplus, said Oxford Economics, an independent advisory firm that has academic links with Oxford University.

However, other analysts said that the weakening regional currencies and prospect of disinflation in Asia could lead the Monetary Authority of Singapore (MAS) to let the Singdollar weaken.

Credit Suisse economist Michael Wan said in a report yesterday that the MAS might ease monetary policy due to a "weaker outlook for headline inflation, which could have made the central bank more concerned".