Singapore’s foreign minister has observed that the conflict in the Middle East is an Asian crisis as much as it is one for the Gulf region.
He is right. Asian economies depend heavily on fossil fuels, which are mostly imported from the Gulf. Higher energy costs, disruptions in the supply of related products – such as diesel, jet fuel, fertilisers and petrochemicals – and the damage done to business confidence are already hurting the region. Inflation has also spiked up, undermining living standards.
Asian economies could be major losers from this conflict unless they have buffers to provide resilience in the form of policy credibility, strong financial systems and diverse economic engines. On that basis, Malaysia and Singapore should emerge from this crisis in relatively better shape than others in South-East Asia.
The base case
Despite hopes for a permanent ceasefire, military tensions persist at the time of writing. Saudi Arabia reported a loss of around 600,000 barrels a day of oil as a result of drones attacking its pipeline and oil production facilities after a truce was supposed to have come into force.
It will take quite some time for oil/gas shipments to return to prewar norms
Even if the fighting ends completely, it will take quite some time for shipments of oil/gas and other critical goods to return to prewar norms, since the Strait of Hormuz will probably remain a risky route for ships for several months to come. Technical issues will be a further complicating factor in the resumption of oil and gas production.
As a result, energy prices can be expected to hover around 20%–25% higher than prewar levels for this year. That will probably reduce global economic growth by 0.2–0.3 percentage points to around 2.5%–2.6%, compared with 3% previously. The more trade-dependent economies in South-East Asia may suffer a slightly bigger fall in growth of perhaps 0.3–0.4 percentage points.
Well-capitalised financial institutions are good shock absorbers
Those estimates are based on the direct effects of higher energy prices. The indirect effects could be worse:
- Rising energy costs could trigger protests and political instability, hitting economic growth even harder.
- Gloomy economic and political news could cause financial market corrections that disrupt fundraising for the ongoing massive capital spending on artificial intelligence that helped Asian economies avoid a slowdown last year.
- A spell of more bad news could crystallise further depreciation of currencies such as the Indonesian rupiah and Philippine peso. That could trigger capital flight and a loss of confidence in those countries.
Downside mitigation
Strong policy responses can help counter such headwinds. But policymakers are in a bind. With growth at risk but inflation rising, easing monetary policy to support economic activity could cause financial markets to rebel. At the same time, the rising spend on fuel subsidies is becoming impossible to bear for some countries, limiting their use of fiscal stimulus. It will be countries with a record of careful monetary policy management and prudent fiscal planning that will do better.
Having diverse growth engines also builds resilience. For example, countries that have secured large foreign investment commitments will tend to hold up better than others, as will those with a programme of heavy investment in infrastructure construction already locked in.
Economic vulnerability is separate from resilience
Finally, an economy with strong shock absorbers will also be better positioned. Plentiful stockpiles of oil and gas are an example of good shock absorbers. Well-capitalised and strongly regulated financial institutions also act as buffers, as they can continue providing credit to companies and so keep the economy humming right through a crisis.
Best placed
In South-East Asia, it is Singapore and Malaysia that are likely to weather the storm better than other economies. At first glance, this may seem counterintuitive since both are highly open economies vulnerable to the inevitable slowing of the global economy. But vulnerability is separate from resilience.
Both economies have central banks with a solid track record of sound monetary management. Singapore has an extraordinarily high volume of fiscal savings available to finance stimulus measures that protect economic growth. While Malaysia consistently records fiscal deficits, these have been relatively low, and investors generally credit Malaysia for keeping public debt under control.
They are also enjoying record levels of foreign investment, which will help bolster economic growth. Finally, both have banking sectors with high capital adequacy ratios and where effective financial supervision limits the risk of financial accidents.
The lesson is clear: the use of periods of calm between crises to build resilience stands countries in good stead.
