Asian economies running out of fuel, and time, as the fallout from 'Epic Fury' widens

By Jules Rimmer

Asia is heavily dependent on imported energy from the Middle East

All regional economies are net importers of oil, although Malaysia, Indonesia and Australia can offset that by exporting gas.

The broadening of "Operation Epic Fury" into a regional conflict is starting to inflict serious economic pain on Asian economies.

Every Asian country is a net importer of oil and therefore vulnerable to higher energy costs, while the second-order impacts of disrupted food supplies, trade flows and remittances will soon filter into all regional economic activity.

These concerns are already manifesting themselves in the performance of regional stock markets as Asia starts to reverse much of its 2026 outperformance of U.S. equities. For example, the iShares MSCI China exchange-traded fund MCHI has fallen almost 8% from its February peak, while the most liquid ETF for Indian shares INDA has dropped 11% and that of Japan EWJ is also down 11% in the last month.

Analysts at French investment-banking firm Natixis Research published a report Thursday warning that declining current-account surpluses will weaken Asian currencies, raising inflation expectations and leading to tighter financial conditions. Of those countries analyzed, Natixis found that, as a major net importer of food and energy, the Philippines is the most susceptible - but no country is likely to emerge from the Iran war unscathed.

For Indonesia, for example, its 2026 budget factors in an average oil price of just $70, compared with the present level (BRN00) that is well in excess of $100. This threatens Indonesia's deficit limit of 3% of GDP.

The upshot for markets is that, after initially allowing their currencies to absorb some of the shock, Asian central banks will be forced into tightening monetary policy.

The Natixis note, written by Trinh Nguyen, looks first at the immediate shock of the oil-price spike that has resulted from a fifth of the world's daily supply being shut in the Strait of Hormuz. Although Malaysia and Indonesia, along with Australia, can offset oil imports with gas exports, the rest of the region will take an instant hit, with Thailand worst affected as a percentage of GDP.

Nguyen, the emerging-markets Asia economist at Natixis, wrote that "higher prices raise import costs that first pass through the current account and then pass on to the economy via more expensive fuel bills or the government will need to pay for it through fuel subsidies."

Nguyen said that most Asian economies operate current-account surpluses at present and may be cushioned for a short period. But sooner or later, the likes of China, Taiwan, Vietnam and Malaysia will be obliged to raise fuel subsidies. China and Japan have significant strategic stockpiles of crude, but will not be fully insulated, especially as there is derivative upward pressure on gas - and even coal - substitutes.

China's diversification into renewables will alleviate some of the pressure, Nguyen said, but its economy is still essentially dependent on oil, gas and coal.

The interruption of urea exports from the Middle East is already starting to increase global fertilizer costs, and the Natixis note explained why this is particularly worrying for Asian economies with weightings for food and transport in their consumer-price-index baskets ranging from 50% to 70%. Poorer countries devote a bigger part of their incomes to essentials like food and transport than countries in the Western Hemisphere.

Nguyen said that countries such as the Philippines and India will experience a major contraction in overseas remittances from workers abroad, with a large number employed in and around the Middle East.

Tourism-dependent economies like Vietnam, Malaysia and Thailand can also expect fewer visitors through the disruption of air routes and the soaring jet-fuel prices that will make air travel that much more costly.

-Jules Rimmer

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03-20-26 1115ET