ASIA's economies will face a fresh test of resilience after oil again crossed the $100 threshold, with inflation running hot and fiscal and monetary policy already tight.
Brent oil spiked over $107 a barrel on Friday amid an uptick in attacks in the Strait of Hormuz, with the US and Iran posturing for a long war. The likes of Japan, South Korea and India rely heavily on imported crude to power their industries, while higher prices increase the cost of fuel subsidies for countries like Indonesia and Thailand.
Policymakers across the region will face pressure to keep cushioning households and businesses, which have seen incomes eroded by sticky inflation. But with budget deficits already bloated and interest rates high, their space to maneuver now is much narrower than before.
"Surging oil prices brought terms of trade, inflation and medium-term fiscal concerns back into play,” said Wee Khoon Chong, senior market strategist for Asia Pacific at BNY in Hong Kong.
While Asia enjoyed better-than-expected growth in the first half of the year thanks to the artificial-intelligence boom, the Middle East conflict continues to hang over the region, which is the most reliant on shipments passing through the Strait of Hormuz.
Price pressures have yet to dissipate from the initial energy shock when the Iran war broke out in February, and higher costs continue to spread beyond transport, to food, utilities and housing.
Most emerging Asian currencies were weaker against the dollar on Friday morning, with the Thai baht the seeing the sharpest drop of 0.7%, followed by the Indonesian rupiah at 0.4%.
Asia swaps for diesel - a workhorse fuel used in transport, construction and industry - have soared by twice as much as Brent crude. Gains in gasoline swaps have also exceeded the global crude benchmark.
Liquefied natural gas prices have likewise surged to their highest level since late-2022, threatening higher power bills across importers like Thailand, Vietnam and the Philippines. The region’s benchmark is set to keep climbing with winter approaching, as Europe and Asia compete for a limited pool of shipments amid ongoing disruptions in Hormuz.
Other economic headwinds are fast picking up. Food prices are under pressure due to the Russia-Ukraine war and the severe El Niño weather disruption, according to Brian Lee, an economist at Maybank Securities Pte. in Singapore.
"In the face of a prolonged increase in input costs with little relief in sight, firms that have held off raising prices in the face of demand uncertainty may be eventually be forced to do so to stave off margin pressure,” Lee said.
The Bank of Japan is widely expected to hike its policy rate next week, while the Reserve Bank of Australia has already signaled it is ready to tighten ahead of its rate-setting meeting later this month.
The Bangko Sentral ng Pilipinas said this week it would "closely monitor” the Middle East conflict after inflation stayed elevated at 6.1% in August, even before the flareup in oil and gas prices. The BSP has said it is ready to keep raising rates to bring the gauge back to its 3% target.
Fiscal buffers are also thinning, if not quite depleted. Thailand and South Korea took on additional spending for stimulus measures, while Indonesia has had to cut its budget for other programs to afford its subsidy bill. Malaysia, which has just expanded subsidised fuel quotas to appease voters ahead of the elections, may now also need to shell out more money.
"For Indonesia, right now, our calculations show that we’re still going to face an average of $90” for crude oil, National Economic Council Deputy Chair Mari Elka Pangestu said at a conference on Wednesday. "Our budget assumption was $70 and now we have to work with $90.”
Thailand’s oil fund, which it uses to stabilise prices, could also sink deeper into a deficit from 83 billion baht to around 100 billion baht ($3 billion), according to Puree Sirasoontorn, associate professor at Thammasat University.
"If the fund alone cannot handle the surge in oil prices, the Thai government may need to borrow money to subsidise fuel prices for consumers, putting further pressure on an already-stretched fiscal budget,” she said.
To be sure, Asia could be better placed now after it took emergency measures at the onset of the war on Iran, tapping petroleum reserves and sourcing energy supplies from Latin America and Central Asia. China, the world’s top oil importer, has reduced fuel shipments and tapped commercial stockpiles in reaction to the crisis.
But with no clear path to resolve the Middle East conflict, HSBC Holdings Plc warns that the "new normal” for the global economy may be one in which "the strait is neither fully closed nor fully open, but persistently impaired.”
"Our new base case assumes that a fragile US-Iran understanding eventually emerges, but remains prone to repeated breakdowns and continued uncertainty,” HSBC said in a note, raising its forecasts for Brent oil to $90 for this year and $85 for 2027. "This leaves the market tighter for longer than we had previously assumed.” - Bloomberg
