S&P assesses oil price impact on China, India, Japan

SINGAPORE, Sept. 19, 2006 "" The economies of China and India continue to grow strongly and the outlook on Japan's economy appears more positive. Each one of these economies, however, is vulnerable to a potential oil price shock, although the respective strengths and weaknesses of these countries means the impact of such a shock would vary in degree and focus.

In three separate reports published today on RatingsDirect, Standard & Poor's Ratings Services examines how three major global economies, China, India, and Japan would react to a potential oil price shock. In each report, potential oil price scenarios are applied to the respective economies, and conclusions are drawn on the likely impact of each oil price hike.

Oil prices, which flared up recently due to the conflict between the Israeli military and Hezbollah guerrillas in Lebanon, have since fallen from their peak levels. The geopolitical situation in the Middle East, however, may well change abruptly.

In the report on China titled "Impact On China Of Potential Oil Price Shock Would Be Contained By Government At Significant Cost", credit analyst Ping Chew of the Sovereign Ratings group says: "China is vulnerable to very high oil prices on account of its developing economy and high-energy needs. The effect of a sharp increase in oil prices to China's economy, however, would not be readily apparent due to the country's extensive distortions and price controls. Although these distortions limit the pass-through effect of high oil prices, they also prevent the economy from adjusting efficiently."

In a separate report on India titled "An Oil Price Shock Would Challenge India's Strong Economic Growth And Benign Inflation Record", Standard & Poor's contributing author Subir Gokarn (Chief Economist, CRISIL) says: "The Indian economy has managed very healthy growth over the past few years and is presently the second fastest growing economy in the world. At the same time, inflation has remained benign and is currently below the 5% mark."

"Importantly, India's recent record of high growth and benign inflation has occurred despite a persistent rise in international oil prices. Although this is indicative of the Indian economy's resilience to high oil prices, the prospect of the country withstanding a potential oil shock will hinge on how oil prices behave in the future,' Mr. Gokarn added

In a third report on Japan titled, "Japan's Economy Would Fare Better Than Most Developed Countries Given A Potential Oil Price Shock", Standard & Poor's credit analyst Takahira Ogawa of the Sovereign Ratings group states: "Having learned its lesson during the oil shocks of the 1970s, Japan is now better prepared to weather another serious spike in petroleum prices than are most other developed countries."

According to a series of econometric simulations carried out by Standard & Poor's Ratings Services, Japan's economy would experience a comparatively minor dip should oil prices linger at about US$100/barrel over the next two years. "Even an extreme case of $250/barrel would not seriously impair the domestic economy," Mr. Ogawa added.

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