Abstract
Global oil prices have subsided relative to the peak reached in mid-2008, but compared to historical levels they remain elevated and volatile as economic uncertainties continue to unfold. The likelihood of these prices rising again soon cannot be ruled out. High oil prices can adversely affect growth, employment, external accounts, and fiscal positions of governments. An overwhelming response across Asia as international oil prices spiked in 2008 was to shield domestic consumers more than before through oil subsidies, which are inequitable, economically inefficient, and environmentally unfriendly. These subsidies add directly to the fiscal deficit and public debt, but are generally hidden, making their measurement difficult. Additionally, in combination with lower growth rates, higher spending to rev up demand across Asia is also worsening the fiscal positions of governments.This paper computes the transmission of recent global oil price movements to domestic markets and estimates oil price subsidies in a diverse group of 32 Asian economies. Using data for 18 of these countries and applying a forward-looking methodology for debt dynamics, the paper then examines the potential impact of responses to macroeconomic shocks and a possible rise in oil prices on public debt and estimates the fiscal correction needed to sustain debt at a steady-state level. Based on the findings from the empirical analysis, the paper extracts some guiding principles for fiscal policy responses to the economic shocks depending on country-specific circumstances.
Highlights
Global oil prices have subsided relative to the peak reached in mid-2008, but they remain elevated and volatile as economic uncertainties continue to unfold
This scenario reflects basic macroeconomic projections and policy assumptions. It charts out the medium-term path of the debt–gross domestic product (GDP) ratio based on the budget flow and projections of macroeconomic variables using the debt dynamics in equation (4)
As economic recovery takes place and the growth rate improves over the projection period, the debt–GDP ratio falls for all the countries
Summary
Global oil prices have subsided relative to the peak reached in mid-2008, but they remain elevated and volatile as economic uncertainties continue to unfold. By February 2009, Brent crude oil prices were on the rise again after touching bottom in December 2008, a level already much higher than the levels observed in the first half of this decade (Figure 1). Despite softening in the growth of demand, a sharp production cut by Organization of the Petroleum Exporting Countries in December 2008 and stalled investment in new oil production and processing facilities in response to recent price declines are likely to keep supply conditions tight. According to the International Energy Agency, output from the world’s existing oil fields is expected to decline at the rate of 6.7% and conventional crude output to peak by 2020 (The Guardian 2008). The uncertain market conditions, speculative demand, and political risk factors could put pressures on oil prices to fluctuate widely.
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