Business Times - 04 Jul 2005

Profits at risk if oil hovers at US$60

Singapore analysts fear foreign demand slowdown

By JEAN CHUA

(SINGAPORE) Economists and businessmen in Singapore are not all that
worried about oil prices for now - but they could be if prices continue
to hang around US$60 and threaten to eat into corporate profits.

Crude oil prices hit an all-time high of more than US$60 a barrel early
last week, raising fears that they might hit US$70 soon.

Although prices have eased somewhat, that might just be a temporary
relief and prices could go up again if supply does not keep up with
demand, some analysts say.

Citigroup economist Sim Moh Siong said that if oil prices continued to
stay high, business and consumer sentiment would be hit. But the greater
effect, he said, would be 'the indirect impact' on exports.

'One of the drivers of the slowdown which began in the middle of last
year has been oil prices,' Mr Sim said. 'For an economy like
Singapore, exports are one-and-a-half times our nominal GDP, so
obviously any slowdown in demand from overseas like Japan and the US is
going to have a huge impact on us.'

Persistently high prices - lasting more than a year - could shave 0.3 of
a percentage point from any growth estimates, said Nizam Idris of
IDEAglobal.

The Bank for International Settlements said in a report last week that if
oil prices were US$10 more expensive - and continued to stay so -
Asia's GDP growth next year could be cut by close to one percentage
point.

Citigroup had a growth estimate of 4.5 per cent for the Singapore economy
at the beginning of the year, and revised it to 3.7 per cent after 'a
horrible first quarter', Mr Sim said.

The Singapore economy shrank an annualised rate of 5.5 per cent in the
first quarter - the worst showing in nearly two years - largely because
of a slowdown in demand for manufactured goods.

Mr Sim said Citigroup is watching how things go in the second half of the
year. 'We haven't downgraded it (its growth forecast) but now it's
pretty much a wait-and-see situation,' he said.

American Chamber of Commerce executive director Nicholas de Boursac said
most businesses would be negatively affected by higher oil prices
through higher cost and poorer consumer demand.

Still, American companies are generally optimistic about the Singapore
economy for the next few months, but less so than they were a year ago,
Mr de Boursac said, citing a Gallup survey of business sentiment done
for the chamber in April.

'To the extent that the US$60 price is not a short-term spike, then,
yes, it will make most of our members less optimistic than when they
answered our survey,' he said.

'Some members who follow the oil prices closely are concerned about a
possible increase in prices in the fourth quarter of the year as that is
a time of high demand in the US for heating fuel,' Mr de Boursac said.

British companies are even more optimistic. Ninety-three per cent of
respondents in a recent British Chamber of Commerce survey believe that
the business outlook in Singapore will get better or remain the same
this year.

It is the smaller businesses that are more worried about the cost of fuel
as it often makes up a large chunk of their costs.

Local businessman Robin Lau, who owns a recycling business that also
makes plastic resins, said electricity and production costs have gone up
30 per cent this year.

'We use a lot of electricity in our processing, recycling,' he said of
his company, KK Asia.

And Mr Lau, who is a member of the Singapore Business Federation,
doesn't think that prices will go down because supply is not keeping up
with demand.

Eyes are also on the American economy. The Bank for International
Settlements said it expected US growth to dip from 4.4 per cent last
year to 3.4 per cent this year.

One Singapore analyst who's worried about a sharp US slowdown thinks
expectations might already be priced into US treasury securities. Last
week, US 10-year treasury bonds rose their sharpest since April, pushing
yields to below 4 per cent.

'Markets start pricing in economic cycles nine months to a year ahead,'
he said. 'They are kiasu that way.'

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.