If sustained, the drop in energy prices could provide a significant boost to the economies of emerging markets. Learn how this system works by reading this article:
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As oil prices continue their slide, cheaper energy costs could provide a welcome respite for some heavily energy dependent emerging markets, analysts told CNBC, but they warned that oil was only part of the problem.
U.S. Nymex crude oil traded below $100 per barrel for the first time in three and a half months on Tuesday, as rising supply levels in the U.S. reduced demand pressure, adding to an 11 percent decline since late August.
“Anything like this goes straight to the bottom line quickly. It could provide a substantial boost to economic growth, if it is sustained, and we think it will be,” said Jonathan Barratt, chief executive officer at Sydney-based commodities firm Barratt’s Bulletin, who forecast U.S. crude to fall to $85 a barrel by the first quarter of next year.
According to Barratt, lower oil prices can benefit all aspects of a country’s economy, especially for a country that is heavily dependent on imports, like India.
“[A lower oil price] represents a significant saving, which translates though to corporates, retailers, and consumers who will spend less on oil and will have more to spend on other goods,” he added.
While most countries in Asia are net importers of oil, countries like India and Indonesia are particularly dependent on the commodity.
Oil accounts for roughly a third of India’s total imports, for example, and higher oil prices earlier in the year put further pressure on the nation’s bloated current account deficit, which reached $21.8 billion or 4.9 percent of GDP, in the three months ending in June.
Some economists however, were less convinced that lower oil prices would really make that much of a difference for heavy energy importers such as India.
According to Seng Wun Song, regional economist at Singapore-based CIMB bank, weaker oil prices were only one factor in a series of variables influencing a country’s trade balance.
“It might help a tad, but a more important driver is the pick-up of growth on the export side,or whether the inflation picture is starting to look more favorable. It is only one variable,” he said.
Song added that he would be wary of being too optimistic on lower oil prices being here to stay.
“This time next week we could be debating the same argument but the other way round,” he said.
“The question is,how long can [U.S. crude] stay down? It could always rebound quickly. You need to know the answer to that question to determine the benefits,” he added.
Meanwhile, Vasu Menon, vice president of wealth management Singapore at OCBC Bank, also said he doubted a weaker oil price would make much difference to the economic plight of struggling emerging markets like India.
“It’s just one in a number of headwinds. India has political issues, structural problems, budgetary issues, an inflation problem, and on top of that there is tapering next year. Oil prices on their own won’t have much influence,” he added.
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