Business Times 28 Jun 08;
Morgan Stanley says that exporters will start to rely on domestic demand
(BEIJING) Record oil prices are 'a blessing in disguise' for Asian economies and currencies as high transport costs will coerce the region to become less reliant on exports and more on local demand, Morgan Stanley said.
Surging oil prices that are raising Asian exporters' costs to ship everything from cars to clothes to the West will encourage them to rely on domestic customers and this will help to reduce global imbalances, according to Stephen Jen, chief currency strategist at Morgan Stanley in London. Crude oil fell after touching an all-time high of US$140.39 a barrel on Thursday.
'In the short run, this is clearly a negative shock to Asia, and for Asian assets, including currencies,' Mr Jen, who used to work at the Federal Reserve and the International Monetary Fund, wrote in a report on Thursday.
'In the long run, however, this shock could accelerate the move away from exports.'
Global imbalances 'should normalise' as Asia's trade and economic growth, which have thrived partly due to the low cost of transport in the past two decades, are affected, Mr Jen said.
Five of the 10 most-active Asian currencies outside of Japan fell this year, led by a 12 per cent decline in the Thai baht and an 11 per cent loss in South Korea's won, according to data compiled by Bloomberg. Taiwan's dollar and China's yuan are the biggest gainers. Rising oil prices are bolstering import bills and squeezing trade accounts in Asia. High transport costs act like 'tariffs' and undermine trade, Mr Jen said, adding that the increase in oil prices coincided with the decline in China's re- exports.
Asia exports raw and intermediate goods to China, and China, in turn, applies the final phase of production before shipping manufactured goods overseas.
The proportion of goods that are first imported from elsewhere and then re-exported out of China declined to 44 per cent from 57 per cent in late 2001, Mr Jen said. 'The ultra positive long-term outlook many investors may have on Asia should be tempered somewhat,' Mr Jen said. 'High costs of transport will act as a temporary headwind for many Asian currencies.'
While this oil 'shock' may encourage more regionalisation as high transport costs erode some differences in labour costs, financial globalisation is likely to continue to accelerate, according to the report. More global capital should be attracted to Asia, Mr Jen said. -- Bloomberg
