How the Gulf War is Becoming a Crisis for Asia. Prices, Debt and Shortages Will Deal a Blow to the World's Manufacturing Engine, The Economist Writes
As missiles and drones fly over the Persian Gulf, their impact is being felt an ocean away. This war is “an Asian crisis,” said Vivian Balakrishnan, Singapore’s foreign minister.
About 80% of the oil and 90% of the gas that typically passes through the Strait of Hormuz are destined for Asian markets.
Poor countries are being hit hardest. In the Philippines, more than 90% of energy imports come from the Middle East; Bangladesh, India and Pakistan receive almost two-thirds of their total liquefied natural gas supplies through this strait.
But rich Asian countries are not immune. Japan has strategic oil reserves equivalent to 254 days of domestic demand, a hedge created after the oil shocks of the 1970s.
However, bus and ferry services across the country have been limited due to a lack of supply.
Japanese hot springs are struggling to cover costs as fuel prices rise; several across the country have announced temporary or permanent closures.
Yamayoshi Seika, a well-known food manufacturer, was forced to temporarily stop producing potato chips after running out of heavy fuel oil for its frying equipment.
The closure of the strait poses three major risks to Asian economies. The first is rising fuel prices. This will also increase costs in other sectors and curb economic growth, potentially triggering a stagflationary spiral.
The immediate impact is being felt by drivers across the region, but especially in Southeast Asia.
Globally, gasoline prices have risen by 14% since the start of the war; in Southeast Asian countries, the figure is 42%. Prices in the Philippines and Myanmar have risen by more than 70%, among the largest increases in the world.
In other parts of Asia, such as India and Bangladesh, the increase has not yet been felt at gas stations, but that's only because their governments control fuel prices. On March 27, the Indian government said it would cut central excise duty on gasoline and diesel to keep prices from rising.
Australia and Vietnam have promised similar measures to absorb rising oil prices. In South Korea, which imports 70% of its oil from the Middle East, the government has set a cap on fuel prices to limit the damage.
The second risk, therefore, relates to the fiscal balances of Asian governments. Many of them already spend significantly to subsidize energy or set fuel prices, but the fiscal space for such interventions varies greatly from one country to another.
In Indonesia, increasing fuel subsidies could cause the country to breach the fiscal deficit limit of 3% of GDP.
Investor confidence, already fragile, would be further damaged. Pakistan, hit by a lack of liquidity and under IMF supervision, has already been forced to raise fuel prices by 20%.
Such pressures could attract the unwanted attention of speculators seeking weaker currencies. The Japanese Finance Ministry is reportedly already considering intervening in the oil futures market to support the yen.
No matter what governments do, some inflation is inevitable. Where governments do not absorb the rising cost of crude oil, higher energy prices will fuel headline inflation.
Oil-importing countries with weak currencies and high import bills, such as the Philippines and Pakistan, will suffer the most.
But even in countries that impose fuel price caps, the war in Iran will exert inflationary pressure through other channels. Disruptions in supply chains will raise costs in other industries, such as chemicals and logistics.
The biggest inflationary force could come through food. The war has affected roughly a third of the global seaborne trade in chemical fertilizers, which will push up food prices, especially when the planting season begins later this year.
The Asian Development Bank had predicted that prices in Asia would rise by only 2.1% in 2026. Now it warns that this figure could exceed 5%, depending on the duration of the war.
If rising prices are an economic problem for Asian policymakers, fuel availability is a political and geographical issue: the third major problem for Asia.
In addition to Japan's 254 days of reserves, China is estimated to have enough to cover 100 days. Both have begun to use these reserves to ease the pressure.
But analysis by Kpler, a data firm, suggests the situation is more fragile in other parts of Asia. It estimates that the Philippines, Vietnam and Thailand only have enough onshore oil reserves to cover about three weeks of normal demand.
The looming shortages are already upending entire sectors. Aviation and tourism could be among the hardest hit. China and South Korea have imposed restrictions on jet fuel exports from their refineries.
Airlines across the region have reduced flights. Over the past week, about half of all global cancellations were flights departing from airports in Asia, according to data from FlightAware, a monitoring platform.
Air New Zealand has canceled 1,100 flights. Governments could step in with even more drastic measures. Ferdinand Marcos Jr., the president of the Philippines, has warned that suspending flights is “a real possibility.”
Together with disruptions to other inputs, such as helium and aluminum, the energy shock could hurt Asia's economic growth.
The Asian Development Bank predicts that Southeast Asia will be hit hardest, with growth rates potentially 2.3 percentage points lower if the war is prolonged.
In South Asia, the bank predicts growth could fall by 0.8 percentage points. The slowdown would have far-reaching consequences: Asia is the factory of the global economy.
A greater push toward alternative energy is expected. Solar power is growing, but this push could accelerate. Many more electric vehicles could begin to circulate in Southeast Asian cities.
Nuclear power will also get a new boost. This week, Vietnam said it would build a nuclear power plant with Russia. But Asia will also return to a familiar and polluting energy source: coal.
The Japanese government has approved a return to full capacity for coal-fired power plants, lifting a restriction imposed to curb emissions. Indian officials, concerned about summer electricity demand, have ordered a coal-fired power plant in the state of Gujarat to resume operations.
The push towards coal is driven by concerns about political stability. Asians are sensitive to energy prices and willing to take to the streets over them: transport workers in the Philippines have already launched protests.
During the 2022 energy crisis, when gas prices soared following the Russian invasion of Ukraine, political unrest erupted in South Asia.
In the year to October 2022, about a quarter of all protests in the region were related to food and energy, according to an estimate by the Friedrich-Ebert-Stiftung, a German institute.
After analyzing social unrest in 101 developing countries between 2000 and 2020, IMF researchers found a clear link between rising fuel prices and protests.
These demonstrations could become revolutionary: the unrest in Sri Lanka, fueled by high energy prices, contributed greatly to the overthrow of the government in 2022.
What started as an energy shock could turn into a political crisis.
