Middle East Conflict Negatively Impacts Asia via Supply Shocks, Worse Terms of Trade, Softer Remittances and Tourism, as well as Financial Shocks

Asia's heavy reliance on Middle Eastern oil and gas makes it particularly vulnerable to the ongoing supply disruptions that have driven up prices for energy. Beyond finding shocked supply, every Asian nation, except for Australia, Malaysia, and Indonesia, is a net importer of energy, leading to immediate pressure on current accounts due to increased costs. A prolonged Middle East conflict impacts Asia through higher energy costs, disrupted food supply due to shortages of fertilizer inputs, impacted trade routes, reduced remittances, and tighter financial conditions.Thailand, Singapore, South Korea, and Taiwan are most exposed to energy cost increases, while Malaysia and Australia have their gas surpluses to offset net oil deficit. The conflict also threatens global fertilizer trade, with implications for food prices, impacting nations like the Philippines the most, as it is a net importer of both food and energy. Even food surplus countries like Thailand and India will be impacted via their production due to higher fertilizer costs. The Philippines and India are most exposed to remittance income from the Middle East. Disruptions to air transport, exacerbated by soaring jet fuel prices, could negatively impact tourism-dependent economies in Southeast Asia such as Thailand, Vietnam and Malaysia.Worse terms of trade, food costs, and disrupted global trade raise the specter of stagflation. But the space to support growth has narrowed for central banks in the region as inflationary pressures rise on weakening FX and higher import costs. Transportation and food weights are large in EM Asia CPI baskets, with Thailand has more than 70% of the weight for food and transportation while others like Vietnam, the Philippines, India, Taiwan and China have more than 50%. The good news is that inflation is low so there is space to absorb shocks. Protectionist policies, such as export restrictions on fuel, are emerging, which could lead to increased imported inflation for vulnerable nations. Fuel subsidies will be costlier as the duration of the conflict rises, with price hikes likely.Current account deficit countries are vulnerable to the above trade and income shocks, especially as investors become more risk averse. We identify the Philippines as the most susceptible to sustained shocks, with Thailand and Korea also facing significant GDP impacts due to their heavy reliance on imported energy, despite their current account surpluses. In EM Asia, Malaysia stands out as most immune even if it is still negatively affected.*This report is updated from Natixis flagship cross-expertise report on “Middle East Conflict: Counting the Shocks on the Global Economy and Impact on Financial Markets” A table of Asia government’s policies on energy is provided at the end of the report to show how individual economies react amid the conflict.