www.financeasia.com By Jame DiBiasio 17 February 2003

Even a swift, successful war in Iraq will have negative consequences for Asia, although China and Hong Kong have a better capacity to absorb a shock, according to analysts speaking at a panel sponsored by the Asia Society in Hong Kong.

A war will lead to some degree of economic slowdown in the West, which will hurt foreign direct investment in China. But companies everywhere, although investing less overall, will also look to cut costs and shift production to China, says Don Hanna, head of economic and market analysis at Citigroup/Salomon Smith Barney. So while FDI reductions are expected, they will be less than global falls in investment. Moreover China's internal consumer story is sheltered from the global economy.

Beyond that, however, most of the analysis is disturbing.

Peter Best, head of oil and gas equity research at CSFB, outlined several themes, not so much to predict oil prices as to assess the drivers behind them.

First, he notes the world already faces an oil problem, even without a war. OPEC has become an effective cartel, while developed countries have experienced lower inventories than they had in 1991. As a result, prices have risen. Moreover big petroleum companies such as Shell and BP have been unable for various reasons to increase production. Crude prices are now $36 a barrel, and a war will spike them to $40. The question is what follows: a price decline with lower demand and new production - or a sustained shortage? He also notes Venezuela may remain offline for some time to come.

Second, he says Asia is the world's biggest net importing region. Over 60% of its oil supplies as a region are imported, and most of that comes from the Middle East.

Third, this is not a short-term problem, but one that will worsen over the next 10 years. This is the flip side to Asia's (and especially China's) high growth rates. China is now around the eighth largest consumer of oil; Best expects it to become the second, after the United States. Meanwhile Asia's home-grown supply of oil is dwindling. As a result Asia's imports of oil will double by 2010 - requiring more oil than the Middle East currently produces.

Best says exposures to oil price rises vary across the region. Japan, despite its dependence on imports, is energy efficient and has a large stockpile, so he says it can ride out volatility. Australia, Indonesia and Malaysia are cushioned because they are also oil producers. China, also a producer, is vulnerable, as it has no reserve, and its growth means exports will grow 400% by 2010, making it as big an importer as Japan.

Taiwan, Korea and Thailand are all importers and have no stockpiles and are inefficient users.

Richard Hancock, Singapore country manager at security and risk management specialist Hill & Associates, says a war is likely to increase the prospects for terrorism in Asia. The length of the conflict, and its portrayal in the media, will shape the extent to which extremists will garner active support among the general population. “Any terrorist group requires a support base,” he observes. A prolonged war with civilian casualties increases the likelihood terrorists can find succour - shelter, information, supplies - in the region.

He also predicts an upsurge in anti-Western demonstrations that could get ugly. “During the Jakarta riots in 1998, Westerners felt they were spectators to events - but the next time they could find themselves the focus.”

Southeast Asia will get rocky. Both the Philippines and Indonesia, as well as Pakistan, have groups capable of getting weapons and making bombs, as well as anti-Western movements beyond the law. Many countries in Southeast Asia suffer from weak anti-terror laws or infrastructure: the ability of Singapore to nip attempts by extremists to bomb US and other Western targets is not universal.

Hanna said most evaluations assumed the war will be a general repeat of the 1991 conflict: short and sweet. This would mean a six-week firefight accompanied by oil at $40 a barrel for three months. But he says there is a possibility that these outlooks are too rosy.

The extent of an oil price spike and its duration depends on whether Iraqi and regional oil refineries are destroyed, as well as the willingness of OPEC members such as Saudi Arabia to increase production. Asia is particularly vulnerable: while US imports of oil equate to 1% of its GDP, Asian imports range from 3-5% of GDP. The Philippines, Korea, Taiwan and India are particularly exposed.

Should oil facilities be destroyed, in a worst case, Hanna sees oil priced at $80 a barrel through 2004, which will cut importers' GDP growth by 2-3%. So in the worst case, US economic growth would not be 2.5% but -0.5%. The benign scenario would have US GDP growth fall to 2.0% for a few months, and then rise on the back of fiscal stimulus and improved sentiment.

It would be worse for Asia, however, as it is dependent on US economic activity. Malaysia, Singapore and Hong Kong are open economies: trade accounts for more than 100% of their GDP. Other Asian countries' trade accounts for up to 50% of GDP. This is quite different to Japan or America, where trade is around 10% of GDP. Hanna notes, however, that Hong Kong is less vulnerable, despite its open economy, because so much of its trade flow is based on China. “Hong Kong is left with a cushion,” he says.

It's not all doom and gloom, either. Hanna notes that Indonesia and to an extent Malaysia, for all their weaknesses, would gain from higher oil prices. He reckons each dollar rise in the price of oil equates to $150 million more in exports. This would result in a strong fiscal improvement for Indonesia. But Hanna frets the offset would not compensate for trade losses for Malaysia. The Philippines, he adds, loses on all counts.

Moreover, all countries will suffer from changes to capital flows, Hanna says. Already risk premiums are rising, which leads to higher interest rates on sovereign bonds, which makes capital-raising expensive and stymies growth. Stock markets will also suffer - a really big problem for the US, where so many people own equities, but also for markets such as Malaysia's which have relatively higher valuations.

He also warns tourism's service flows will decline throughout Southeast Asia, particularly in Malaysia and Thailand.

Governments do have ways to counter these effects, Hanna says, by pursuing fiscal stimulus programmes. This is easier in North Asia: he notes Korea and China already are running fiscal surpluses. Hong Kong has been worried of late of deficits but has room to spend its way out of trouble, as have Singapore and Thailand. Indonesia cannot afford this option, but has the higher oil price. The Philippines' deficit is too far out of hand, however.

Lastly, Hanna foresees weaker exchange rates across the region. Even if higher oil prices spark inflation, he doubts central banks will tighten policy and raise interest rates. Such a move wouldn't take care of the problem of an oil shortage, and besides, inflation rates are already so low that it's not seen as a problem, for now.

Note that many of these observations are accounting for a middle-of-the-road outcome to the war. A best-case scenario would mean a short-lived spike in oil prices, followed by high growth in the US.

But to realize this requires a short war; the discovery of a ‘smoking gun' involving a weapon of mass destruction that is targeted at a neighbouring Muslim country; a stable post-Saddam Hussein Iraq; European investment in the new Middle East and participation in peacekeeping; and a focus on resolving the Israel-Palestine conflict. The extent to which these outcomes are not realized will determine how badly Asian economies suffer.

www.stuff.co.nz 17 February 2003

SINGAPORE: To paraphrase President George W. Bush, the climb in oil prices is the re-run of a bad movie that Asian economic policy makers would rather not watch.

As was the case during past oil shocks, the price surge induced by the spectre of war against Iraq is taking a toll on growth and trade balances in a region that, except for Indonesia and Malaysia, is a big net importer of oil.

A day after China reported its first monthly trade deficit in six years due to a soaring oil bill, Thailand forecast on Friday an Iraqi war lasting 45-90 days would shave 1.1 points off the country's projected 2003 GDP growth of 3.5-4.5 percent.

But even if the movie still ends unhappily for Asia, economists see a ray of hope: dearer energy is unlikely to increase inflationary pressures to the point that central banks would feel compelled to react by raising interest rates.

"What central banks don't want to see is the initial rise in headline inflation starting to seep into core inflation later down the track," said Rob Subbaraman of Lehman Brothers in Tokyo. Because inflation is already very low and fierce competition - especially from China - has sapped the pricing power of producers, Lehman Brothers projects that even if oil averages more than $30 a barrel this year inflation will remain below five percent except in Indonesia and the Philippines.

Such an outcome would be a replay of the second half of 2000, when a spike in oil prices was largely absorbed by a compression in corporate profit margins.

Still, consumers are unlikely to get off scot-free, even if a number of Asian governments have announced plans for subsidies to curb increases in pump and kerosene prices.

This leads economists such as Andy Xie at Morgan Stanley in Hong Kong to argue that, in the current weak global environment, rising oil prices will intensify deflationary pressures by reducing consumers' disposable incomes.

"Ultimately inflation depends on income, so in the short term you have a cost push and prices might rise some more. But over time a higher oil price is deflationary because people have less to spend," Xie said.

As a result, unless policy makers have their hands tied by wage indexation, a central bank should respond to an oil shock by easing monetary policy, Xie argues.

Even in the case of South Korea, Asia's biggest energy importer, Xie sees a case for the central bank to cut its discount rate by half a percentage point to 3.75 percent at its next policy-setting meeting on March 6.

Underlying Xie's view are beliefs that the South Korean economy is weakening rapidly as its credit bubble deflates and that oil prices are headed lower, not higher.

US oil prices jumped as much as 34 cents on Friday to $US36.70 ($NZ67.14) per barrel, the highest since mid-October 2000, as worries over Middle East oil supplies swelled before chief UN weapons inspector Blix reports to the Security Council.

But Xie said dear oil was already built into sagging stock prices. "The global trade cycle is heading down and a resolution of the Iraqi conflict is in sight," he said. "So for the market it is time to look beyond today's higher oil prices."

This is far from a universally held view.

David Roche of Independent Strategy agreed high energy prices would act as a tax on consumption and would not become a source of inflation. But in a note to clients he said any relief rally following an expected war against Iraq would be brief.

"Energy prices will stay high, kept there by supply risk and low inventories," Roche wrote.

Economists at investment bank Goldman Sachs also see oil staying high throughout the year, partly reflecting the disruption to the global supply/demand balance from the recent oil workers' strike in Venezuela as well the impact of sustained underinvestment throughout the oil industry.

There's no escaping the pain that Asia would endure if prices stay high. Goldman Sachs economists Sun-Bae Kim and Enoch Fung estimate Asian GDP growth in 2003 would be reduced by 0.9 percentage points, from their baseline forecast of six percent growth, if oil stays at $US35 a barrel for nine to 12 months.

That hit underscores Asia's energy dependency. On average, East Asia's oil bill equals 2.1 percent of GDP but in Singapore it is 7.6 percent and in South Korea it is 4.8 percent.

Under the same scenario, growth in the 30 industrial countries that are members of the Organisation for Economic Cooperation and Development would be trimmed by just 0.2 percentage points from a baseline of 1.6 percent.

Still, Kim and Fung struck an optimistic note in a recent report, describing the impact of $US35 oil on Asia as manageable.

In short, the Iraq movie sequel won't produce a happy ending but it shouldn't be an economic tear-jerker.

"The shock is of course even more severe under a $US40 a barrel scenario, but still broadly manageable," they wrote.

www.therecord.com Saturday February 14, 2003 - 18:42:42 EST MALCOLM MORRISON

TORONTO (CP) - Stocks finished higher Friday as investors swooped to buy beaten-down shares in what's perceived to be an oversold market amid uncertainty as to what will happen next with the Iraqi crisis.

The Canadian dollar closed at 65.66 cents US, down 0.23 after a half-cent gain Thursday, and gold fell $5.70 to $351.30 US an ounce in New York. Stock markets took heart from a relatively positive assessment of Iraqi compliance from chief United Nations chief weapons inspector Hans Blix, who said Friday that UN inspectors haven't found any weapons of mass destruction.

On the other hand, Blix said, many banned military materials remain unaccounted for and U.S. State Secretary Colin Powell asserted "the threat of force must remain" - causing markets to initially give up their early gains.

Still, the Dow industrial average was up 158.93 points to 7,908.8 late in the day. The blue-chip barometer edged up 44 points on the week.

The Nasdaq was ahead 32.73 at 1,310.17 for a gain of 27.7 points this week and the S&P 500 index rose 17.52 to 834.89.

Gains in the information technology sector helped balance weakness in the gold sector to give the S&P/TSX index a gain of 34 points to 6,487.13, adding 9.39 points this week. The junior TSX Venture Exchange was up 8.36 at 1,095.49.

On the Toronto Stock Exchange, Nortel Networks advanced 11 cents to $3.53. The financial sector was also stronger as Royal Bank rose $1.30 to $56. The gold sector fell 2.6 per cent. Barrick Gold lost 87 cents to $24.

Crude oil futures edged up 44 cents to a 29-month high of $36.80 US a barrel on the New York Mercantile Exchange. Crude prices have been pushed up by the Iraqi crisis and a general strike in Venezuela, another major petroleum producer.

Analysts were doubtful the gains of the session would stick since the Blix report didn't convince markets that war would be averted.

"The running assumption in the markets right now is that there will be a war, it will happen - happen very quickly - and the second half of the year will be very strong," said Mark Chandler, financial markets economist at Scotiabank.

The U.S. market was supported by a solid earnings report Thursday from Dell Computer. The No. 2 maker of personal computers reported record fourth-quarter sales and a profit of $603 million US, up 32 per cent. Its shares rose $2.54 to $25.77 US.

In economic data, American industrial production rose 0.7 per cent in January after a 0.4 per cent drop in December. But the University of Michigan consumer confidence index fell to 79.2 for February, its lowest level since September 1993. A reading of 82.5 had been expected.

Analysts said the confidence number had little effect on the markets, perhaps because previous swings in the index have not been reflected in consumer spending.

"What they tell the polls is very different from what they do at the shopping mall," said Patricia Croft, managing partner at Sceptre Investment. "So I pay more attention to what they do than what they say."

On the Toronto market, advances beat declines 545 to 496 with 225 unchanged.

The bottom line of Telus, Canada's second-largest phone company was hit by restructuring and workforce-reduction charges. Losses for the fourth quarter totalled $139.2 million, triple the $46.7-million loss a year ago. Telus shares rose 52 cents to $16.90.

Rogers Communications, which controls major cable TV, wireless phone, broadcasting, publishing and sports businesses, reported a sharp turnaround from a $173.7-million loss a year ago.

But the $698.2-million profit at Rogers Communications came from a $904.3-million gain on the sale of its shares in AT&T Canada. Excluding non-recurring items, Rogers lost $88.3 million. Rogers B shares rose 78 cents to $13.63.

Shares in the Brascan conglomerate were ahead 20 cents at $29.90 after it reported that it lost $174 million in the fourth quarter after a charge at its Noranda mining subsidiary. However, Brascan reported solid results from its financial, property and energy-generation operations, with cash flow from operations up 17 per cent on the year.

Another big Canadian conglomerate, Onex, lost $145 million last year as several businesses it controls - notably electronics assembler Celestica - struggled. Onex shares lost 17 cents to $14.45 while Celestica advanced 44 cents to $16.60.

Canfor was down 24 cents to $9.46 after the B.C. forestry producer said it earned $11.5 million in 2002, despite low prices for lumber and pulp and the burden of $108 million in American import tariffs. The year's profit was down from $26.4 million in 2001. Canfor stock fell 24 cents to $9.46.

Other active Toronto stocks included ATI Technologies, ahead 27 cents at $6.43, Bombardier, up 15 cents to $5, and Inco, down 47 cents to $31.43.

Toronto volume was 143.8 million shares worth $1.61 billion.

The Nasdaq Canada index was up 2.31 points to 222.25.

english.eastday.com

China unexpectedly posted a trade deficit for the first time in more than six years as it stored crude oil ahead of a possible war on Iraq and consumers took advantage of tariff cuts to buy more imported cars.

The deficit in January was US$1.25 billion, the first time the nation has posted a shortfall since December 1996, Xinhua news agency said, citing Customs statistics. Imports rose 63 percent to US$31 billion, driven by a 78 percent increase in the volume of oil imported. Exports rose 37 percent to US$29.8 billion.

General motors Corp. and other carmakers took advantage of China's entry into the World Trade Organization to import more cars into the country and also to increase production at plants assembling parts shipped from overseas.

"It is surprising," said Robert Subbaraman, an economist at Lehman Brothers in Tokyo. "My suspicion is there were temporary factors involved. Oil prices have been going up so China might be trying to front load their imports."

As china imported greater quantities of oil, prices rose. The price of crude in New York has risen 73 percent in the past year on concern an Iraq war may disrupt supplies from the Middle East. A workers' strike in Venezuela also reduced output from the world's fifth largest exporter of the fuel.

Crude could extend its gains because of the "war jitters" and increased concern about supplies in the U.S. after inventories last week fell to the lowest since 1975, said Gordon Kwan, an oil and gas analyst with HSBC Securities in Hong Kong.

China will build a 20-million-ton strategic oil reserve to protect itself from a war in Iraq and other conflicts that may disrupt supply from the Middle East, the government said last month. The country plans to stockpile about 149 million barrels, enough to meet oil demand for one month, said Song Chaoyi, a deputy director at the State Development Planning Commission.

As china's economy expands at the fastest pace of any major Asian nation, incomes are rising, increasing the affordability of foreign cars, wines and other goods. At the same time, the local prices of these pro-ducts are falling as tariffs fall following China's entry into the WTO.

Car imports rose more than three-quarters to 127,394 units last year after the country increased its vehicle quotas as part of its WTO commitments. Car and auto part imports totaled US$860 million last month, two-and-a-half times what they were a year earlier, according to Xinhua. China will increase its vehicle import quota 15 percent this year to US$9.12 billion.

www.thehollandsentinel.net Web posted Saturday, February 15, 2003 In Brief - Business

WASHINGTON -- The United States, which struggled through a stop-and-go recovery last year, should see the economy steadily gain strength in 2003, according to a panel of prominent economic forecasters.

But that outlook from the National Association for Business Economics comes with an important caveat -- any U.S. war with Iraq ends quickly.

A panel of 37 top economists, who prepared NABE's latest quarterly outlook, said Friday that President Bush's call for a new round of tax cuts would provide a moderate boost to the economy this year and next.

But the forecasters said that an even bigger positive factor would be a quick resolution of the war, which would remove uncertainty that is holding back business investment plans.

Krispy Kreme shares increasing in value

WINSTON-SALEM, N.C. -- Shares of Krispy Kreme Doughnuts Inc. shot up Friday after the company said earnings in the current fiscal year would jump 35 percent above those of the year just completed.

Krispy Kreme said in a news release that it expects earnings of 88 cents a share in fiscal 2004, which began this month, and a 10 percent sales growth at its existing stores. Krispy Kreme also plans to open 77 stores in the next 12 months.

Shares of Krispy Kreme soared $2.75, or nearly 10 percent, to close Friday at $31.15 on the New York Stock Exchange.

General strike hurts Venezuela economy

CARACAS, Venezuela -- A general strike and lingering recession have taken a heavy toll on the Venezuelan economy, which shrank nearly 17 percent in the final quarter of last year, according to government figures released Friday.

The nation's oil sector, which accounts for about a third of gross domestic product, contracted by nearly 13 percent in the fourth quarter as thousands of workers walked off their jobs while the government of President Hugo Chavez worked to restore production.

Overall, the economy fell 16.7 percent in the fourth quarter and 8.9 percent for the entire year, Planning Minister Felipe Perez said Friday on a government Web site.

Most of the contraction in the economy was due to reduced oil production, a combination of Venezuela's adherence to lower production quotas established by the Organization of Petroleum Exporting Countries, followed by the general strike, which began Dec. 2.

TELECOM

France Telecom plan: Halve debt in 2 1/2 years

France Telecom hopes to cut its debt by nearly half, to a ``bearable'' level of about 35 billion euros ($37.9 billion) within 2 1/2 years, the company's chairman said Friday.

France Telecom's debt at the end of 2002 is expected to be about 68 billion euros ($73.6 billion), said Thierry Breton. He said debt will be cut by reducing the company's working capital and operating costs, and with ``marginal'' asset sales.

Costs will also be reduced through job cuts, although those will be from normal departures and retirements only, not layoffs, he said.

BANKING

Lloyds Group profit drops 40 percent

British bank Lloyds TSB Group on Friday reported a 40 percent decline in profit for the second half of 2002, blaming rising provisions for bad loans and a lingering bear market for stocks.

Net income for the period was 668 million pounds ($1.1 billion), compared with 1.1 billion pounds ($1.8 billion) a year earlier. The bank froze its dividend and said it would need to invest money in its pension fund to compensate for falling stock prices.

Rising provisions for bad loans and falling stock prices have also hit other British banks, including Barclays and Abbey National.