By Eadie Chen SINGAPORE, Jan 20 (Reuters) - As a combination of plunging commodity prices and declining exports drastically changes Asia's terms of trade, exceptionally weak currencies, such as South Korea's, are likely to see disproportionate benefits.
Most of Asia, barring Malaysia and Vietnam, imports huge amount of oil. Therefore, the fall in oil prices to a third of last year's average of nearly $100-per-barrel is clearly a plus for the region.
Yet, those savings on the oil and food import bill have been offset partially, even wholly in some cases, by the sharp fall in exports to western markets reeling from economic recession and a financial crunch.
"Certainly in the case of Singapore and even Taiwan, the weakness in exports will more than offset the benefits from the fall in oil prices," said Robert Prior-Wandesforde, co-head of Asian economics at HSBC. Economies of Singapore and Taiwan are among the most export-dependent in the region.
On the other hand, trade balances should improve and the current account deficits in Indonesia and South Korea will narrow substantially, Prior-Wandesforde says.
David Mann, strategist at Standard Chartered Bank, reckons the won will be Asia's biggest beneficiary of the drop in oil prices. "It was hit hard in 2008 by high oil and U.S. funding stress, so should recover more quickly than others this year."
For the same reason, analysts expect that currencies that went through double-digit declines in 2008 on account of their hefty food and oil imports -- such as the Indian rupee, Thai baht and Philippine peso -- will be at the fore of a rally this year as long as investors' appetite for risk returns.
Reflecting lower oil prices and a weaker exchange rate terms of trade, or the number of units of imports each unit of export can buy, turned positive in December while Thailand's terms of trade, rose to 99.83 in November from 96.1 in July.
Last year import prices on average climbed 36 percent in won terms in South Korea, which is the world's fifth largest oil importer and also has exports accounting for 45 percent of its economic output.
But thanks to a 25 percent collapse in the won's value against the dollar, export prices in won terms on average rose nearly 22 percent last year.
TAIWAN, SINGAPORE TAKE A HIT
Standard Chartered forecasts that South Korea's current account will once again be balanced in 2009 as import demand falls, after posting its first deficit this decade in 2008.
"The fact that oil has completely collapsed is a major positive factor that will support Asia trade," said Callum Henderson, head of Standard Chartered Bank's global foreign exchange strategy.
"It's a major positive. And it will provide some degree of support for current account balances. And that will be a reason why investors start to come back to the region in the second half of this year and particularly next year," he added.
The slide in oil prices is going to be a significantly supportive factor for consumption and the domestic side of the economy, Henderson said, although it would take up to six months for the impact to be seen owing to the elasticity of the economy to oil prices. Standard Chartered Bank forecasts the won -- which was Asia's worst performer in 2008 -- will resume an appreciation trend by the second half of this year, hitting 1,150 per dollar at the end of 2009 from 1,260 at the end of 2008.
It also forecasts the Indian rupee will rise to 47-per-dollar by the end of April from the current 48.8.
"I might take a biddish bias towards the Korean won and Philippine peso because of the diving oil prices," said a trader in Manila. "There was a huge drop in Korean reserves last year. If oil prices continue to drop, it might be a plus for the won".
HSBC expects a sharp narrowing of current account surpluses in Singapore and Taiwan in 2009, while it foresees Korea's current account returning to a surplus.
Ominously, terms of trade have already deteriorated in both Taiwan and Singapore. Taiwan's import prices in local currency terms rose nearly 9 percent in 2008, while export prices fell two percent. Taiwan's export readings have been grim, falling off a cliff in December by 42 percent from a year earlier.
Singapore's import price index fell 7.3 percent in November from a year earlier, while exports fell 6.4 percent. The currency ended 2008 unchanged from a year earlier
Malaysia, whose oil proceeds accounted for about 8 percent of its GDP in 2008, the highest in the region, will probably suffer the most from lower oil incomes this year. Analysts predict a negative fallout for Malaysian exports as well as domestic demand. (Additional reporting by Choonsik Yoo in Seoul, Vithoon Amorn in Bangkok, Lee Chyen Yee in Taipei; Editing by Vidya Ranganathan & Kazunori Takada)