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Mapping vulnerabilities to Middle East shock

The escalation in Iran-centred tensions in the Middle East has resulted in a halt in energy supplies through the Strait of Hormuz since early-March, marking a significant supply shock to the global economy, including ASEAN-6 countries.

We assess vulnerabilities of these six economies across four dimensions: 1) oil & gas (O&G) consumption and trade balances, 2) exposure of energy supply chains to the Middle East, 3) inflation risks, and 4) reliance on tourism.

Southeast Asia is experiencing a negative terms of trade shock from the global energy price spike, leading to higher energy imports and jump in input costs for businesses as well as consumers. ASEAN’s O&G consumption at ~6.5% of GDP is higher than the Asia Pacific, and most countries are net O&G importers. Thailand is the most vulnerable, with O&G consumption of ~10% of GDP, and the most adverse net O&G trade deficit at 5.4% of GDP. The Philippines and Vietnam follow. Malaysia is likely a beneficiary, supported by its net oil & gas trade surplus of ~1% of GDP, despite O&G consumption exceeding 10% of GDP.

The region is exposed to constrained shipments of O&G and fertilisers from the Middle East. For crude oil, except Indonesia, the rest of the region receives more than 50% of their imports from the Middle East. The Philippines and Vietnam are the most vulnerable, importing 95% and 85% of their crude oil from the Gulf. Intra-region supplies meet the need for refined petroleum, with Singapore as a key supply hub. Exposure is generally limited to the Middle East LNG supplies, except for Singapore and Thailand. However, Singapore’s LNG import mix is well distributed beyond Qatar, sourcing from Australia, Mozambique, and the US. On urea fertilisers, Thailand - a key agriculture producer – stands out as the most vulnerable regionally. An overwhelming 70+% of Thai urea imports were sourced from the Middle East in 2024, compared with 10-20+% for Malaysia, Philippines, and Singapore.

Upside inflation risks are assessed through the weights of energy and food items in each economy’s consumer price index basket. These items account for the largest weight in the Philippines, Thailand, and Indonesia. However, in Indonesia, the passthrough from higher energy prices is partly mitigated by fuel subsidies.

Although Singapore has the lowest combined weight for energy and food in the region, it remains highly vulnerable to price shocks, as it imports nearly all its energy and food needs.

Regional economies could also be affected through weaker foreign tourism, despite small direct exposure to visitors from the Gulf visitors, accounting for ~2% or less of total arrivals. Tourist inflows could soften not only due to higher airfares driven by surging jet fuel prices, but also disruptions to long-haul European flights. About a-third of Europe-Asia flights transit through Gulf hubs, and Europe accounts for ~15% of ASEAN’s total tourists. Thailand’s tourism is the most vulnerable, with 27.3% of total visitor arrivals coming from the Middle East and Europe, while Malaysia has the lowest exposure at ~5%.

Across seven metrics (see heatmap), we assess that Thailand and the Philippines are the most vulnerable to the Middle East shock, while Indonesia and Malaysia appear relatively insulated among the ASEAN-6 economies.

Mitigating response measures

Regional national governments and central banks have actively undertaken measures to mitigate the impact of the energy crisis and defend domestic financial markets from global volatility.

• Supply diversification and reserves. Countries have not only sought alternate fuel resources but have also stepped-up purchases from other suppliers for O&G. While the immediate switch has been to existing fossil supplies, other options like renewables, piped gas, and nuclear resources are being explored. Governments have also considered plans to expedite biofuels (e.g., Indonesia raising its palm-based biodiesel B50) to cut oil imports, with the push however likely to be constrained by relevant infrastructure and usage architecture. Russia, Norway, US, etc have emerged as alternate suppliers, though admittedly incremental flows are at a premium to prevailing prices. The region’s (except for Singapore) reserve fuel/ oil buffers are likely to be impacted negatively if the West Asia crisis prolongs, not helped by a relatively weak starting point.
• Subsidies and price controls. Countries like Indonesia, Malaysia, and Thailand that have fuel subsidies in place have preferred to absorb additional costs rather than passing it on to the end consumer. However, if Brent prices stay elevated north of USD100/bbl for another quarter, we expect the governments to consider passing on part of the additional cost. Add to this, conservation steps akin to work-from-home policy for the public sector, limited travel by officials, and cap on fuel purchases at the pump (Indonesia), freeze on cooking gas prices (Thailand), targeted support for the transport sector, enhanced corporate tax rebate and energy efficiency grant for businesses, and cash support for households (Singapore), energy emergency measures (Philippines), and financial support package for MSMEs and loan guarantees (Malaysia), have been announced.
• Financial market support. Central banks have been actively taking measures to stabilise the domestic financial markets, particularly intervention to defend the currency. If the Middle East tensions are prolonged, policymakers are likely to offer credit support via interest subvention or credit guarantee schemes, akin to during the pandemic. As we discuss in the subsequent section, Singapore and Philippines have already tightened monetary policy to contain inflationary risks and back the currency.

In terms of preparedness and impact, most resilient are Singapore and Malaysia, which have a mix of domestic energy resources, infrastructure, and sufficient reserves. Others are relatively more vulnerable due to a mix of high import dependence, growing fiscal strain which will necessitate subsidy cuts, and limited fuel strategic reserves.

Incoming data signal cost-push inflation, counterbalancing factors on growth

Incoming March 2026 data provide the first indication of how the Iran war-induced energy shock impacted inflation-growth variables. The impact on consumer price inflation is clearly skewed to the upside, while goods exports remain resilient amid mixed forward-looking manufacturing sentiments, relative to December 2025 numbers.

Higher energy-driven inflation was visible across the region in March to varying degrees depending on the extent of policy support. Headline inflation rose sharply in the Philippines and Vietnam, breaching their respective central bank targets of 2-4% and 4.5%, and will remain elevated. Singapore, which allows a complete feed-through of fuel prices, saw inflation rise, with broadening upside risks. Thailand’s negative inflation reading narrowed slightly but is poised to accelerate after the removal of the diesel price cap in late-March. By contrast, upside pressures in Indonesia and Malaysia were relatively contained, aided by targeted fuel subsidies.

The region’s positive exports momentum in January-February sustained into March. The resilience was supported by strong growth in electronics shipments, underpinned by robust external demand driven by global artificial intelligence (AI)-related tailwinds, a trend we expect to persist in the near term. The sector’s proactive adoption of helium recycling and reclaiming systems has, for the time being, mitigated disruptions to helium supply from the Middle East, of which Qatar is a major supplier. Malaysia’s oil & gas exports performed well in March and will remain a beneficiary of elevated global energy prices.

Manufacturing purchasing managers index (PMI) continued to expand across ASEAN-6, albeit with uneven momentum, moderating in Indonesia, Thailand, and Vietnam. PMIs showed early signs of mounting input cost pressures stemming from higher energy and raw material prices linked to the Strait of Hormuz disruption. This would squeeze factory profitability at a time when external demand could weaken if capital expenditure declines amid heightened uncertainty.

Sequence of policy tightening risk

Against the backdrop of brewing Middle East tensions, ASEAN-6 banks confront a familiar but intensified policy dilemma: how to respond to externally driven energy inflation without derailing domestic growth. Regional central banks loosened policy levers in 2024-2025 after tightening rates soon after the pandemic as price pressures rose on the back of post-Covid recovery, pent-up demand, fiscal stimulus, and supply-side shortages. With the recent energy shock, the inflation management agenda needs to be balanced with other monitorables, including extent of energy dependence, currency pressures, domestic financial conditions, and potential growth risks. 

Monetary policy is a relatively blunt instrument to address supply-side price pressures, although this assumes importance if inflationary expectations face the risk of being unanchored or currency depreciation triggers rate-sensitive capital outflows, necessitating a policy response. To this end, the sequence of policy tightening risks amongst the ASEAN central banks will be dictated by the risk or scale of a pass through of higher oil & gas prices to domestic prices or risks of any cut in subsidies or fuel price increases, which will carry first and second order impact to price stability.

Singapore’s MAS set the ball rolling in April by becoming the first in the region to adopt a measured tightening, slightly increasing the slope of the SGD NEER policy band to curb rising imported inflation, and anchor inflation expectations. Joining the MAS, the Philippines’ central bank BSP also tightened policy to defend the currency and pre-emptively contain inflationary expectations.

The narrative across the rest of the region is considerably more differentiated, with the tightening sequence likely to play out as follows: 

a) Hawkish camp – with BSP already kickstarting the hiking cycle, Vietnam and Indonesia are next in this camp, as they face a higher likelihood of action if global energy prices remain elevated, and respective currencies depreciate significantly;

b) Middle ground – An increase in retail fuel prices and resultant impact on inflation will be an important determinant of a shift in Malaysia’s policy outlook;

c) Gradualists – Thailand is unlikely to exhibit urgency in tightening policy. While Thailand will likely experience higher inflation that returns to the central bank’s 1-3% target in 2026, policymakers face a dilemma as higher fuel costs also supress a fragile economy by biting into consumption and firms’ margins amid weak credit conditions.

Overall, the first line of response will be fiscal support – delivering targeted and well-structured support to limit price pass-through, ease supply constraints, and sustain consumption through transfers, subject to available fiscal space. Monetary policy would follow if second-round effects begin to materialise, particularly to contain broader inflation pressures and safeguard currency stability.

Flows outlook and rating changes

In wake of tensions in the Middle East, investors have been selective in their investment decisions, gravitating toward safer assets while pulling back from markets perceived to be vulnerable to oil price volatility. We are also mindful that few countries also faced tepid flows before the geopolitical troubles surfaced in March 2026, therefore making the foreign portfolio outflows more persistent. For the debt markets, the spreads with USTs have largely compressed post pandemic, but could rewiden if the regional central banks become keen to attract rate sensitive flows.

As the above chart highlights, portfolio flows have been tentative since the breakout of the energy crisis. The regional current account imbalances have not been a flashpoint for the region, with five of the six economies in ASEAN-6 enjoying small deficits to surplus balances in the past four-five years. Incrementally, however, oil import balances will weaken, thereby putting pressure on the respective trade balances, such as Thailand and Vietnam. In this context, the flows outlook will assume importance as a key financing item for the overall balance of payments position.

Click here to read the full report.

Chua Han Teng, CFA

Economist - Asean

[email protected]

Radhika Rao

Senior Economist – Eurozone, India, Indonesia

[email protected]

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