By Albert Park and Matteo Lanzafame
Geopolitical risk is again at the centre of the global economic outlook. While Asia and the Pacific has limited direct trade exposure to Iran and neighboring countries, it could still face significant adverse economic consequences.
Disruptions in the Middle East can ripple out to Asian economies through multiple channels. Policymakers across the region should be prepared to respond to potential shocks to energy prices, trade flows, and financial conditions.
Historically, conflicts in the Middle East have affected the global economy primarily through oil supply disruptions. Today, the risks are broader. The current crisis highlights vulnerabilities not only in energy production but also in global transport networks for oil, gas, goods, and people.
The Strait of Hormuz—a narrow waterway connecting the Persian Gulf with global markets—plays a crucial role in global energy trade. Around 20 percent of globally traded oil and liquefied natural gas passes through it, and roughly 80 percent of those shipments ultimately head to Asia. This means that even partial disruptions can have significant consequences for economies in the region.
Shipping data indicate that vessel traffic through the Strait of Hormuz has fallen sharply as companies reassess security risks. Insurance costs for ships have risen. Freight rates for transporting crude oil from the Middle East to Asia have increased significantly.
For Asian economies that depend heavily on maritime trade—both for importing energy and exporting manufactured goods—such disruptions can quickly raise costs across entire supply chains.
The most immediate economic impact, however, is likely to occur through energy prices. Asia is the world’s largest energy-importing region, with net oil and natural gas imports exceeding 2 percent of GDP in several economies. Even moderate increases in global energy prices can translate into sizable economic losses.
Attacks on energy infrastructure in the Middle East and concerns about disruptions to shipping routes have already pushed energy prices higher. Between 28 February and 9 March, Brent crude oil prices surged by about 45 percent, with natural gas prices also spiking sharply.
Higher energy prices affect economies in several ways. For households, rising fuel and electricity costs reduce purchasing power. For businesses, higher transport and production costs squeeze profit margins. For central banks and governments, the challenge becomes managing inflation and fiscal sustainability without undermining economic growth.
Geopolitical shocks also affect financial markets. Periods of uncertainty typically lead investors to seek safe-haven assets, strengthening the US dollar and tightening global financial conditions.
For many Asian economies, this creates additional challenges. Because oil is priced in dollars, a stronger dollar can increase the domestic currency cost of energy imports. At the same time, tighter global financial conditions—including through widening sovereign spreads—can raise borrowing costs and reduce capital inflows, particularly in more vulnerable emerging markets.
Not all economies in Asia face the same level of risk. Large energy-importing economies—including the People’s Republic of China (PRC), India, Japan, and the Republic of Korea—are particularly exposed because of their heavy dependence on imported crude oil. The PRC alone imports around 11 million barrels of oil per day, making it the world’s largest oil importer.
Some smaller economies dependents on fossil fuel imports may be even more vulnerable because of relatively high macroeconomic sensitivity. Countries such as Pakistan, Sri Lanka, and Thailand rely heavily on imported energy, and rising oil prices can quickly translate into higher inflation and pressure on current accounts and exchange rates.
Exposure alone does not determine vulnerability. The availability of emergency oil stocks, commonly referred to as Strategic Petroleum Reserves, materially affects how long economies can cushion an energy supply disruption. Japan, the Republic of Korea, and the PRC have several months of reserves, while India’s reserves are somewhat less. Tourism-dependent economies such as Maldives, Sri Lanka, Thailand, and Pacific economies may face additional risks if aviation disruptions persist. Airspace closures across parts of the Middle East have already forced airlines to reroute flights, potentially affecting tourism flows and air cargo shipments.
The overall economic impact will depend on how the conflict evolves. If tensions remain contained and major shipping routes stay open, the economic effects may be limited mainly to higher energy prices and increased market volatility.
However, a more severe escalation—particularly one involving prolonged disruptions to the Strait of Hormuz—could have more significant consequences. Sustained disruptions could push oil prices much higher, weaken global trade, and slow economic growth.
The policy response should focus on stabilisation rather than suppressing price signals. Shielding consumers from higher domestic energy costs through price controls or subsidies could distort market incentives and undermine the efficient allocation of resources. To protect vulnerable groups, targeted support is needed.
Central banks should prioritise reducing excessive swings in exchange rates and liquidity provision before tightening monetary policy aggressively, especially where inflationary pressures originate externally. Premature or excessive policy tightening could suppress growth and exacerbate financial volatility.
Governments can also play a role by monitoring early warning signs—such as shipping costs, aviation disruptions, and financial market volatility—that may signal deeper economic stress.
Economies in Asia and the Pacific have shown remarkable resilience to global shocks in recent years. To better withstand new challenges caused by the current conflict in the Middle East, it will be critical to strengthen energy security, diversify supply chains, and maintain sound macroeconomic policies.
𝑇ℎ𝑖𝑠 𝑏𝑙𝑜𝑔 𝑤𝑎𝑠 𝑤𝑟𝑖𝑡𝑡𝑒𝑛 𝑏𝑦 𝐴𝑙𝑏𝑒𝑟𝑡 𝑃𝑎𝑟𝑘, 𝐴𝐷𝐵 𝐶ℎ𝑖𝑒𝑓 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑠𝑡, 𝑎𝑛𝑑 𝑀𝑎𝑡𝑡𝑒𝑜 𝐿𝑎𝑛𝑧𝑎𝑓𝑎𝑚𝑒, 𝐴𝐷𝐵 𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟 𝑜𝑓 𝑀𝑎𝑐𝑟𝑜𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑅𝑒𝑠𝑒𝑎𝑟𝑐ℎ.
