- Of the countries we cover, only Malaysia is slated to benefit.
- For the rest, upside to inflation and downside to growth is gathering swiftly.
- China has considerable stockpile.
- India and Singapore have been diversifying their energy mix.
- Japan, South Korea, Taiwan, and Thailand have substantial worries.
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Commentary: Asia’s vulnerability to Iran crisis
The ongoing conflict in Iran, with intense strikes by Israel-US and sporadic reprisals from Iran, is making the markets anxious. Although the conflict is characterised by highly asymmetric balance of power, and the intensity of Iran’s missile and drone responses has already diminished, fears of energy shipments through the Straits of Hormuz getting disrupted is rising. USD100/barrel oil, unthinkable two weeks ago, is now very much on the cards.
The region’s criticality to global energy supply is well understood, but for several Asian economies, the risk extends to well beyond energy. For India, nearly 13% of total exports go to the Middle Eastern countries that are adjacent to the conflict zone. Nearly two-thirds of those exporters are bound for the UAE. Potential disruption to shipping routes there would pose a major downside to its exporters.
Beyond India, for the Asian countries we track, exports to the Middle East make up for less than 5% of their total exports. A demand shock there would not be trivial, but not sufficient to put the exports sector under distress, in our view. It’s a whole different ball game when it comes to importing energy.
India, Japan, South Korea, and Taiwan are particularly exposed to energy imports from the conflict affected area. Singapore and Thailand are not far behind. Looking for alternative sources of supply or routes might be feasible, but at greater cost and considerable delays.
There are three channels of concern. First, economic activity and hiring could be curtailed in response to higher energy prices and reduced corporate margin. Second, inflation could shoot up in areas beyond energy prices, as producers grapple with higher cost of production. Third, as import bills rise due to higher prices, the trade balance would worsen, affecting the balance of payments, with adverse implications for the currency. Below we present an analysis, done by our economists, on country-by-county impact if oil remains at around USD100/barrel for the rest of the year. 
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