Oil prices compound inflation concerns

Markets are concerned that rising oil prices will lift inflation and hit economic growth in Asia. Relative to their economies, Korea and Taiwan are the biggest net oil importers within the region but we believe India and Thailand would probably struggle most if oil prices were to remain at their current levels. The output of the latter two is relatively energy-intensive, while government finances would also suffer were existing fuel subsidies to remain in place. The risk of higher inflation bringing an aggressive policy tightening is highest in India and Indonesia, where inflation is already uncomfortably high. That said, we think oil prices will fall back later this year, ending 2011 lower than where they are now.