Asia Struggles to Contain Economic Fallout as Energy Crisis Deepens

BY COMFORT OGBONNA

Governments across Asia are racing to cushion their economies from a worsening energy shock triggered by the ongoing conflict involving Iran, but the financial strain is mounting quickly. As the world’s largest oil-importing region, Asia is feeling the pressure more intensely than most, with rising costs, slowing growth, and weakening currencies all adding to the challenge.

The Asian Development Bank has already downgraded its economic outlook for developing Asia and the Pacific, cutting growth forecasts to 4.7% for this year and 4.8% for 2027, down from earlier projections of 5.1%. At the same time, inflation expectations have been raised to 5.2%, reflecting the growing burden of energy prices across the region.

A major driver of the crisis is the disruption to oil flows through the Strait of Hormuz, a critical route that typically carries about 20% of the world’s oil and gas supply. With the strait partially closed for months, Asia—responsible for roughly 85% of Gulf crude imports—has seen its oil inflows plunge sharply. Data indicates imports fell by 30% in April compared to a year earlier, marking their lowest level since 2015.

To soften the blow, governments have turned to costly emergency measures. Many are spending billions on fuel subsidies, cutting taxes on petroleum products, and waiving import duties to shield consumers from skyrocketing prices. These policies have helped stabilize domestic markets in the short term, but they are placing enormous pressure on national budgets, particularly in South Asia where fiscal resources are already limited.

In India, state-controlled refiners have kept fuel prices steady despite surging global crude costs, absorbing heavy losses in the process. Analysts, however, expect that price increases may follow as political pressures ease after recent elections. Across the region, governments have also introduced measures to limit fuel consumption, prevent hoarding, and in some cases restrict exports to prioritize domestic supply.

China, the world’s largest oil importer, has managed to weather the crisis more effectively than many of its peers. With large strategic reserves, a diversified energy supply network, and tight export controls on key commodities, Beijing has been able to stabilize its domestic market. In some cases, it has even extended limited support to neighboring countries by allowing selective exports.

Despite these efforts, the broader economic impact is becoming increasingly visible. Goldman Sachs noted that while the region has shown resilience so far, growth forecasts for major economies like Japan and parts of Southeast Asia have been trimmed, while inflation expectations continue to rise. Analysts warn that a key uncertainty remains: whether the region’s resilience is sustainable or simply the result of rapidly depleting reserves and temporary policy measures.

Currency markets are already reflecting the strain. Several emerging Asian currencies—including those of Philippines, Thailand, and Indonesia—have weakened significantly against the U.S. dollar since the conflict began. In contrast, China’s yuan has remained relatively stable, while Japan has intervened to support the yen.

Some of the most vulnerable economies include Pakistan, Bangladesh, and Sri Lanka, where governments rely heavily on subsidies to keep energy affordable. These countries face the dual challenge of rising import costs and limited financial buffers, making them particularly exposed to prolonged disruptions.

In response, nations are adopting a range of coping strategies tailored to their specific circumstances. Indonesia has moved to prioritize domestic energy needs by limiting exports and redirecting supply, while also seeking alternative sources from Africa and Latin America. It is reportedly planning significant oil purchases from Russia to offset reduced Middle Eastern supply.

Elsewhere, Thailand has paused some crude purchases as domestic stockpiles increase, aided by higher refinery output and restrictions on exports. Meanwhile, Japan—which depends on the Middle East for about 95% of its oil—has increased imports from the United States despite higher costs and longer shipping times. The country has also begun releasing millions of barrels from its strategic reserves in an effort to stabilize supply.

While Asia is arguably better prepared than during the global energy shock triggered by the 2022 war in Ukraine, the current crisis is testing the limits of that preparedness. Governments are drawing down reserves, stretching fiscal budgets, and experimenting with policy tools to keep their economies afloat.

For now, these measures are buying time. But as the conflict drags on and supply disruptions persist, the region faces a difficult question: how long it can sustain these defenses before deeper economic consequences begin to take hold.