A smoother ride on growth path

Falling oil prices will be a boost for the domestic economy as low prices fuel growth in overseas markets that buy Singapore goods - but there will be some losers too

Singapore's skyline.
Singapore's skyline. PHOTO: BLOOMBERG

This article was first published on Jan 13, 2015

The latest dramatic plunge in oil prices to below US$49 a barrel, with no apparent bottom in sight, has come as a shock to investors and analysts, given the relatively stable state of the global economy.

But the fall is also an unexpected bonanza for consumers, and should act as an international stimulus for growth and, in turn, Singapore's economy.

Oil prices have slumped more than 50 per cent since last June, the most since the 2008 global financial crisis, amid a supply glut. Part of the reason is that the Organisation of Petroleum Exporting Countries is refusing to reduce output for fear of losing market share to competitors, such as shale oil producers in the United States.

Analysts are tipping that prices of benchmark Brent crude could fall to as low as US$40 a barrel.

The scale of the global effect is significant. Think-tank Oxford Economics has estimated that every US$20 fall in the oil price raises global growth by 0.4 per cent within two to three years.

Net oil importers such as China, India, Singapore and the US are likely to benefit from this growth windfall.

For Singapore, economists expect growth of 3.2 per cent this year, an improvement from last year's estimated 2.8 per cent. This is largely on the assumption that cheaper oil will fuel US economic strength, which will in turn power demand for exports, making up for softer growth in Singapore's other key trading partners China, the euro zone and Japan.

Barclays Capital economist Leong Wai Ho sees Singapore exports to the US and industrial production picking up by the middle of this year as lower petrol prices stimulate more US consumer and business spending and, in turn, orders and, thus, Singapore exports.

Beneficiaries and losers

BUT not all sectors of Singapore's economy will gain equally from lower oil prices. A closer look reveals the beneficiaries and losers of cheaper oil.

Petroleum refining, which accounts for 0.4 per cent of Singapore's GDP, should benefit as feedstock prices drop.

Other beneficiaries include petrochemicals and utilities companies, where petroleum accounts for between 15 and 33 per cent of input costs, and industrial users of electricity such as semiconductor plants.

But a number of industries that are part of the oil supply chain could be hurt by weaker oil demand - like marine and offshore engineering, which accounts for more than 10 per cent of Singapore's industrial production.

Companies such as Keppel Corp and Sembcorp Marine are likely to be affected, said Citi economist Kit Wei Zheng.

He noted that the surge in these companies' rig order backlog since 2012 has already peaked, "and lower oil prices may reduce oil- and gas-related capital expenditure, further accelerating the decline in the order backlog".

Meanwhile, companies for which oil makes up a large part of costs will benefit.

These include transportation companies such as SMRT and ComfortDelGro, logistics firms like SingPost, airlines and shipping firms. Transport and storage accounts for 6.5 per cent of Singapore's GDP.

But CIMB Research economist Song Seng Wun warned that this benefit could be offset by modest growth in freight volumes as global expansion moderates, and by high wages and rentals, which constitute a bigger chunk of these companies' operating costs than fuel costs.

Like motorists the world over, Singaporeans are enjoying lower pump prices, with the commonly used 95-octane grade falling further to $1.79 per litre as of Friday, down 35 cents from last October. Also, businesses and households could soon enjoy lower electricity tariffs.

This could make consumers feel richer, which may in turn spur them to spend more, giving retailers a boost. But any benefit to retailers could be dampened by a slowing property market, which lowers consumer confidence, Mr Leong warned.

Lower oil prices could hit alternative-energy projects, which gained momentum in recent years on the back of high oil prices.

But the extent of this effect would depend on how much further crude prices decline and how long they stay at such levels, Mr Song said.

"Singapore's push towards a green economy isn't likely to change... but lower oil prices may slow investments in alternative energy because it may not make as much economic sense now."

Deflation not a threat

ECONOMIC growth aside, plunging oil prices have given rise to a relatively rare and often worrying economic phenomenon: Negative inflation, which hit Singapore last November - for the first time in five years.

Consumer prices fell 0.3 per cent that month, from November 2013, mainly due to fluctuations in Certificate of Entitlement premiums and cheaper oil.

Given tumbling oil costs, analysts expect Singapore to see more frequent headline deflation readings. In the worst-case scenario, a deflationary spiral can occur if consumers and businesses cut spending in anticipation of further price falls. That slashes businesses' sales and earnings, triggering wage cuts and unemployment, and more dips in demand and prices.

But in Singapore's case, economists are not unduly concerned as long as core inflation, which excludes private road transport and accommodation costs and is seen as a better gauge of everyday expenses, stays in positive territory.

While the Government tips overall inflation of just 0.5 to 1.5 per cent this year but "firm" core inflation of 2 to 3 per cent, it has cautioned that these could come in slightly lower, "should global oil prices be sustained at current low levels".

"If core inflation is still positive, that means the economy is still growing and there's no undue weakness in demand," Mr Leong said. "Plus we are at full employment and there are foreign worker curbs in place, and modest growth is expected. So we're unlikely to go into deflation."

If history is anything to go by, cheaper oil is much more likely to be a boon than a bane for Singapore's economy.

In 2008, weakness in oil demand stemming from the global financial crisis led to oil prices plunging from US$133 to US$40 a barrel, which helped resuscitate the global economy and trigger a sharp rebound in growth in 2010.

So, while the domestic economy will still face its fair share of challenges this year, including restrained growth in most major economies and productivity struggles at home, lower oil prices should at least give it a slightly smoother ride.