The escalating Iran-Israel conflict is weighing on Southeast Asian economies, as tensions in the Middle East have boosted inflationary pressures and heightened uncertainty, analysts said.
Heightened tensions between Israel and Iran, a major oil exporter, pushed benchmark crude oil prices to top the $90 per barrel threshold on April 5, up nearly $8 a barrel from early March, according to the International Energy Agency.
High oil prices combined with the resilience of the US dollar against Southeast Asian currencies will boost consumer prices, increase interest rates, and dampen business sentiment
Tensions in the Middle East have been intensifying in recent weeks after Iran launched retaliatory strikes on Israel on April 13. This marked Iran’s response to Israel’s April 1 bombing of an Iranian diplomatic building in Syria.
High oil prices combined with the resilience of the US dollar against Southeast Asian currencies will boost consumer prices, increase interest rates, and dampen business sentiment.
Dio Herdiawan Tobing, head of public policy for Asia at the Amsterdam-based World Benchmarking Alliance, said higher oil prices are hurting member states of the Association of Southeast Asian Nations (ASEAN) as they import at least 50 percent of their crude oil requirements from the Middle East.
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Tobing said rising oil prices and currency depreciation may divert ASEAN’s attention from transitioning to a sustainable economy as outlined in the regional bloc’s Post-2025 Vision roadmap.
“The fear would be monetary policy and subsidies could be prioritized to meet immediate energy demands heavily influenced by fossil fuels,” he said.
Tobing added that rising oil prices serves as “a crucial reminder” for ASEAN to boost its development of renewable energy which could reduce the region’s vulnerability to geopolitical tensions around crude oil.
Josua Pardede, chief economist at Permata Bank in Jakarta, Indonesia, said when global oil prices soar, “the threat of high global inflation again looms over the global economy”.
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Pardede said oil-importing countries like Indonesia may experience increased import-related inflation pressure.
“With the global economy weakening and commodity prices normalizing, negatively impacting export performance, Indonesia’s trade balance surplus could quickly turn into deficit, triggering a widening of the current account deficit and putting pressure on the rupiah,” he said.
David Gibson-Moore, president and CEO of Gulf Analytica, a business consultancy to international firms and family offices in Dubai, said increased hostilities in the Middle East “would likely push oil prices beyond the critical $100 per barrel mark”
David Gibson-Moore, president and CEO of Gulf Analytica, a business consultancy to international firms and family offices in Dubai, said increased hostilities in the Middle East “would likely push oil prices beyond the critical $100 per barrel mark”.
Gibson-Moore said the inflationary impact caused by higher oil prices will be “wide-ranging and could dramatically influence domestic economic stability and trade”.
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“Central banks may well be obliged to increase interest rates to combat this wave of inflation. This would cause volatility in Asian equity markets and falling bond prices,” he added.
Pardede, from Permata Bank, said Middle East tensions are also pushing investors to opt for safe-haven assets such as the US dollar and gold. This is bad news for the rupiah, he said, as investors withdraw funds from high-risk assets, especially from emerging economies such as Indonesia.
“Capital outflows from the Indonesia’s stock and bond markets are feared to increase after the conflict between Iran and Israel escalates,” Pardede said.
Bank Indonesia (BI), the country’s central bank, stepped in when the rupiah fell to 16,108 against the US dollar on April 16 — its weakest level since April 2020.
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On April 24, BI Governor Perry Warjiyo said the BI increased the benchmark interest rate by 25 basis points to “strengthen the stability of the rupiah exchange rate against the risk of worsening global risks”.
The Thai central bank has kept interest rates unchanged. On April 24, Bank of Thailand (BOT) Assistant Governor Piti Disyatat said that the BOT has intervened in currency markets to ease any excessive moves in the baht, Reuters reported.
The Malaysian ringgit continues to struggle after falling to a 26-year-low of 4.8053 against the greenback in February.
Prime Minister Anwar Ibrahim said that the government “will take appropriate actions to promote continued financial stability and orderly functioning of markets while also being concerned about the potential economic fallout from the current situation that may impact the people of Malaysia”. Anwar also serves as Malaysia’s finance minister.
Leonardus Jegho in Jakarta contributed to this story.
