The blockade of the Strait of Hormuz is dragging the Asia-Pacific region, often seen as the "global growth engine," into a systemic crisis. Fertilizer shortages threaten Vietnam's rice harvest, South Korean cosmetics face reduced supply due to a lack of plastic packaging, and Australian cattle farmers warn of potential red meat shortages.
Before the outbreak of the US-Israel-Iran war, the Asia-Pacific region was considered one of the areas with the greatest growth potential. However, as the conflict drags on, the Asian Development Bank (ADB) forecasts a growth rate of 5.1% for developing Asian economies this year. It warns that if oil prices rise to $155 per barrel and remain high, regional growth could lose 1.3 percentage points, with inflation climbing over 3 percentage points. A recent UN report estimates the war could push 8.8 million people in Asia-Pacific into poverty, with economic losses reaching $299 billion.
Sheana Yue, Senior Economist at Oxford Economics, stated that for weaker Asian emerging economies, the recovery cycle could last several quarters, potentially until mid or late 2027. Rising prices for various goods, including food, are further suppressing real household incomes and dragging down private consumption.
"Even without considering external shocks, looking solely at domestic demand, the recovery will be very slow," Yue said. She believes that while the Middle East conflict is far from a major turning point for Asia, it is sufficient to incentivize regional countries to strengthen resilience. Countries like Singapore, China, and South Korea will accelerate their green energy transitions. Weaker emerging economies like the Philippines and Thailand, while unable to access technology and equipment on the same level, will adjust their economic structures by seeking diversified energy supply partners as a defensive measure.
"Inflation rates will be significantly higher over the next four to five quarters."
According to data from global commodity and shipping analytics firm Kpler, after nearly two months of the Strait of Hormuz being effectively closed, Asia's overall oil imports in April plummeted by 30% year-on-year to their lowest level since October 2015. Asia previously absorbed 85% of the Gulf's crude oil exports.
Affected by supply issues, rising energy prices in multiple Asian countries are increasing transportation costs. Currently, diesel prices in the Philippines have surged by about 140%, Vietnam by 110%, Malaysia by 100%, and Singapore by 67%. Indonesia is maintaining price stability through fuel subsidies.
In Singapore, Southeast Asian ride-hailing and food delivery platform Grab has increased its per-trip fuel surcharge from S$0.50 to S$0.90 and is considering introducing a fuel surcharge in Thailand. Ferries from Singapore to Indonesia's Batam have begun adding a S$6 fuel surcharge. In Vietnam, to cope with rising diesel prices, Vietnam Railways Corporation announced a 3% increase in passenger fares in April. Combined with a price hike in March, the war has led to a total increase of over 10% in Vietnam's railway passenger fares.
The Asia region relies on the Middle East for fertilizers and related inputs like urea and ammonia. The blocked shipping lanes are driving up agricultural production costs and food prices.
Research indicates that urea, a nitrogen-based fertilizer using natural gas as a key production input, is the world's most widely used nitrogen fertilizer. Stopping its application could reduce wheat yields by more than half, while a phosphorus fertilizer shortage could decrease rice yields by about 30%. Reports state that one-third of the global urea fertilizer supply has been disrupted, with fertilizer prices rising by 40%. Southeast Asian farmers are choosing to abandon or reduce planting for the current season or reduce fertilizer use, which may lead to lower crop yields and subsequently push up food prices.
According to data from Thailand's Ministry of Commerce, the average price of pork in the country reached 165 baht per kilogram over the past week, an 8% increase from pre-war levels. Meanwhile, chicken prices rose by 3% and egg prices by 9%. Palm oil prices also increased by 8%, driven by rising demand for crude oil alternatives.
Sheana Yue noted that besides fertilizer prices, food prices are constrained by production cycles. "From sowing to harvest, to reaching stores, it requires a full crop cycle. We expect the impact on food prices to last for at least four quarters. Compared to pre-war levels, inflation rates will be significantly higher over the next four to five quarters."
Several ASEAN countries have issued inflation risk warnings. Vietnam's Ministry of Finance stated on April 23 that this year's inflation rate could soar to 5.5%, exceeding the government's 4.5% target. On the same day, the Bangko Sentral ng Pilipinas (BSP) raised its policy rate by 25 basis points to 4.5%, citing persistently rising domestic core inflation. The country's core inflation jumped from 2.4% in February to 4.1% in March. The Philippines became the second ASEAN member, after Singapore, to tighten monetary policy in response to global energy shocks.
Yue pointed out that price increases are not an isolated national phenomenon but are spreading across the region. Although some economies have quarterly energy price adjustment mechanisms that somewhat dampen volatility, the impact will still gradually manifest in the second or third quarter.
She believes the energy price surge triggered by the current US-Israel-Iran war differs from the period of the Russia-Ukraine conflict in 2022. The current inflationary shock primarily stems from the cost side, while economic growth has already slowed significantly. In 2022, growth momentum was strong, and inflation was more driven by demand.
"Therefore, monetary policy cannot solve supply-side shocks. Even if policy rates were raised ten times, it wouldn't directly lower supply-driven inflation. Based on this assessment, we expect many Asian central banks, even if they have already raised rates, will likely only hike once more and then stop. This is more of a preemptive measure, signaling to markets and policymakers that 'we are closely monitoring the situation.' Only if the shock truly evolves into a long-term problem, triggering second-round effects like broader food and price increases, and this state persists for an extended period, might we see more rate hikes," Yue explained.
Prosperity in Stock Markets Masks Divergence
The degree of impact from the energy shock varies significantly across Asian economies. Countries like India, the Philippines, and Thailand, whose growth relies heavily on traditional manufacturing and services, face difficulties in securing fuel supplies and containing economic downturn pressures.
In stark contrast, Japanese and South Korean stock markets have repeatedly hit new highs recently, with investors reaping substantial profits. Economists warn that this "divergence" will have significant implications for monetary policy, political stability, and future economic growth across the Asian continent.
In the first quarter of this year, South Korean chipmakers Samsung Electronics and SK Hynix both reported record-high profits, with Samsung's market capitalization surpassing the $1 trillion mark. Driven by the rise of AI-related chip stocks, the South Korean stock market surpassed the UK and Canada within weeks to become one of the world's top seven stock markets. Meanwhile, profits disclosed by several major securities firms in Seoul are now equivalent to those of large commercial banks.
Notably, while the AI industry is energy-intensive, its massive scale of capital alleviates energy supply pressures. Developed tech-oriented economies like Japan, South Korea, and Taiwan not only possess more ample energy reserves but also have the financial strength to secure additional energy inventories at higher prices.
In financial centers like Tokyo, stock markets hitting new highs are no longer seen as a cause for celebration but rather a cyclical norm. On a rainy night when the Nikkei 225 first broke the 60,000-point milestone, bar owner Imabayashi Yuto noted that customers actually come more when the stock market crashes. "The Japanese stock market repeatedly hitting new highs is no longer enough to attract crowds."
While the AI boom continues, Asia's most vulnerable poor face severe consequences from the Middle East war. The United Nations Development Programme (UNDP) estimates the conflict has put 8.8 million people in Asia-Pacific at risk of falling into poverty and could reduce regional GDP by 0.3% to 0.8%.
Economies benefiting from the AI boom also face the real challenge of uneven wealth distribution. In South Korea, tens of thousands of Samsung Electronics union members, dissatisfied with lagging wage growth, are planning a strike from May 21 to June 7. Simultaneously, as consumption activity weakens, the Bank of Korea has warned that the disconnect between real market sentiment and overall GDP growth is widening.
Researchers point out that in Taiwan, the semiconductor industry employs about 4% of the workforce, with top entry-level engineers earning up to five times more than their peers.
This stark wealth disparity is termed the "K-shaped economy." Originally referring to economic recoveries where the economic conditions of different social classes, industries, or groups diverge significantly—some improving rapidly while others continue to deteriorate, forming a trend resembling the letter "K."
Economists warn that this divergence could further lead to stagflation, a combination of slowing growth and accelerating inflation. "We might not only see inflation but also a scenario of falling employment, weakening demand, and rising prices coexisting—commonly known as stagflation. On top of the fuel crisis already impacting the poor, the wealth gap will further intensify," analyzed Jayant Menon, Visiting Senior Fellow at the ISEAS – Yusof Ishak Institute in Singapore.
Is the New Energy Transition More Urgent?
JPMorgan wrote in an April 30 report that pre-war global oil inventories were "relatively ample," curbing excessive energy price increases. However, the prolonged war means a tipping point is rapidly approaching. Estimates suggest that of the total 84 billion barrels of global oil inventories, only 8 billion are readily available. By the end of April, governments had released 2.8 billion barrels.
The new energy crisis is pushing countries within the region to accelerate their transition to renewable energy. Beatrice Tanyangco, Chief Climate Economist at Oxford Economics, noted in a report that renewables are relatively less affected by commodity price shocks, primarily due to their unique cost structure.
Take solar and wind power, for example. These renewable technologies require no fuel input. Their costs are concentrated in upfront capital expenditure, followed by relatively low fixed operating costs and minimal variable costs. Although the construction phase of infrastructure remains vulnerable to price fluctuations of commodities like metals, once operational, the marginal cost per kilowatt-hour is close to zero. This "high upfront cost, low later cost" structure allows renewables to effectively withstand price volatility in fossil fuel markets.
The South Korean government is accelerating its renewable energy transition. According to set targets, renewables will account for 20% of South Korea's power mix by 2030, and the country will phase out coal power by 2040. To implement these goals, the government has allocated approximately 500 billion won in supplementary budget to upgrade its grid infrastructure. Simultaneously, the government's annual total support for renewable energy projects will also increase to a record 1.1 trillion won.
In Southeast Asia, the energy crisis is accelerating the shift towards solar power. Indonesia has set an ambitious target to increase rooftop solar capacity to 100 gigawatts. Vietnam proposes installing rooftop solar systems on at least 10% of office buildings and residences nationwide by 2030. Thailand is also studying new policies to increase the actual returns for rooftop solar users by raising the amount of surplus electricity the national grid can purchase. In the Philippines, which is in a state of national energy emergency, market changes are more drastic. A survey of 20 local solar companies showed that after the conflict erupted, weekly solar installations increased by 70%, and customer inquiries surged sixfold.
Sheana Yue believes that for Southeast Asian countries, transitioning to renewable energy is a goal with longer-term significance, beneficial for both environmental protection and enhancing economic autonomy. Southeast Asia has favorable climatic conditions; most countries are islands or have long coastlines, suitable for developing solar and wind power. For ASEAN economies already involved in liquefied natural gas (LNG), the practical path will be to prioritize increasing LNG usage and upgrading grids before advancing renewables.
A recent joint report by Bain & Company and Standard Chartered pointed out that Southeast Asia's power grids urgently require increased investment and reform to achieve system expansion and modernization.
The report shows that many grids are constrained by a series of rigid and杂乱 rules, which not only limit private operator participation but also lack innovative power purchase agreement (PPA) arrangements. Additionally, lengthy grid connection times frustrate investors. The report authors noted that between 2021 and 2025, 50% to 60% of renewable energy projects in Vietnam, Thailand, and Indonesia were canceled due to systemic issues, including unclear PPA structures, permitting obstacles, and ambiguous grid connection rules.
Yue pointed out that the new energy transition cannot be achieved simply by building infrastructure; the biggest bottleneck lies in grid structure. "The cost of upgrading all grid infrastructure is extremely high, which will be a key constraint for any energy transition. Specifically, obstacles in infrastructure construction are also reflected in access to related machinery and equipment, which many Southeast Asian economies do not possess."
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