SINGAPORE: The Strait of Hormuz has been disrupted since the US attacked Iran on Feb 28. The duration of the closure has caused unparalleled disruption to supplies of all forms of energy sources and their derivatives. Sharp rises in the prices of oil and gas have spread widely, fuelling inflation.
Southeast Asia relies on the Gulf region for more than half of its crude oil imports, with the shares for the Philippines and Vietnam exceeding 90 per cent. Seven months later and with no end in sight, it is timely to take stock of how the region is faring economically, and to assess the efficacy of policies implemented to mitigate costs.
The macroeconomic transmission mechanism for energy-importing countries (all except Brunei and Malaysia) starts with a terms-of-trade deterioration, as import prices rise relative to export prices. This immediately strains the balance of payments, reflecting a decline in the overall condition of a country’s international trade and investment flows and currency reserves.
The ongoing turmoil has also drained fiscal resources as imported energy bills and social subsidies balloon. After seven months, the poorer countries, especially the Least Developed Countries (LDCs) of Cambodia, Laos, Myanmar and Timor Leste face dwindling foreign exchange reserves that limit their capacity to import.
Local currencies can come under pressure to depreciate, which raises import prices and can exacerbate inflation. A vicious cycle can ensue, culminating in stagflation – the double jeopardy of economic stagnation and higher unemployment alongside higher inflation.
ROBUST GROWTH
So far, economic growth in most of Southeast Asia has remained robust. This is because the artificial intelligence boom has provided a massive growth injection to countries involved in the electronics supply chain, particularly Malaysia, Thailand, Singapore and Vietnam.
These countries have also benefitted from investments associated with supply chains relocating from China to minimise US tariffs. The presence of these growth boosters, alongside negative factors such as the El Nino effect on agriculture, complicates evaluations of the impact of the US-Iran conflict on economic growth.
For the Southeast Asian region, Asian Development Bank (ADB) had in December 2025 forecasted 4.4 per cent growth for 2026, but now it foresees growth reaching 4.7 per cent. This upgrade demonstrates how the AI boom is more than offsetting the negative effects from the conflict and El Nino.
It also highlights how the conflict is less of a growth shock than a welfare shock, with inflation reducing purchasing power, especially of low-income households, and widening rich-poor gaps.
Between 2025 and the forecast for 2026, developing Southeast Asia’s (excluding Singapore) growth is expected to change only slightly despite a sharp rise in inflation. However, the Philippines and the LDCs could see deteriorations in both: reduced growth and increased inflation.
DISPROPORTIONATE BURDEN ON THE POOR
Inflation disproportionately burdens the poor by diminishing the disposable income they heavily depend on to meet basic needs. These adversities are compounded in poorer countries with limited safety nets.
Governments have responded to the inflationary pressures amid economic slowdown, but their policy choices could compound the social consequences. One commonly deployed method to mitigate the social effects is by increasing fossil fuel subsidies to keep pump prices low, but this further strains fiscal resources.
In Indonesia and Malaysia, price caps have been retained, thereby significantly increasing the subsidy element and the cost to public coffers. Thailand and Vietnam allowed some price increases but intensified fuel-price stabilisation measures while cutting fuel taxes. In these countries, the subsidies and tax cuts are poorly targeted, reducing their effectiveness in reaching the most indigent, while raising budgetary costs.
The Philippines tried to target its assistance to those most affected, focusing on low-income workers in transport, agriculture and fisheries. However, the support provided was minimal and did not fully offset the sharp price increases.
Minimising distortions to the price mechanism aligns with the aspired longer-term shift towards renewable energy. The Philippines shows that refraining from fossil fuel subsidies is more congruous with the green transition.
CURRENCY PRESSURES
While price caps may delay macroeconomic impacts, allowing full pass-through to retail prices will produce immediate inflationary and currency pressures. However, these pressures can be mitigated through different means. The Philippines’ central bank, Bangko Sentral ng Pilipinas, was forced to raise interest rates thrice, but it did not prevent the peso from falling to all-time lows.
Currency depreciation despite interest rate increases can raise inflationary expectations while dampening investment and consumption, thus increasing the risk of stagflation. Like the Philippines, Singapore also allowed full pass-through to retail prices, but managed inflation through currency appreciation by employing its substantial foreign exchange reserves.
Myanmar’s political crisis and Laos’ debt crisis are impairing their ability to mitigate the macro impacts of the fuel price shock, although increased demand for electricity associated with AI data centres is a partial offset for Laos.
Cambodia’s low debt levels and widespread dollarisation are acting as inflation buffers, but its border closure with Thailand is affecting fuel and fertiliser supplies, as well as cross-border tourism flows, compounding an international travel slowdown induced by higher jet fuel prices.
The Philippines and the above LDCs are suffering the worst macroeconomic and social impacts from the Strait of Hormuz closure. It is no coincidence that these countries are also the most economically vulnerable, with limited financial resources and the highest poverty rates.
The longer the shock persists past the seven-month mark, the greater the risk of stagflation, with irreversible effects on the welfare of the poor. These countries, along with Indonesia, face rising fiscal vulnerability and even the risk of sovereign debt distress, which would further constrain their capacity to respond to evolving disruptions like the El Nino effects.
The Philippines is the most oil-dependent on the Gulf region, while the LDCs are exposed both directly and indirectly, through their dependence on third countries like Thailand for refined fuel. Although Thailand and Vietnam are also heavily reliant on the Gulf region, an investment boom driven by new technologies and shifting geopolitics is outweighing the negative growth impacts from the conflict.
Beyond the buoyant growth numbers, the real effects of current crises are mainly social and distributional, with especially adverse impacts on the vulnerable in poor countries.
Jayant Menon is a Visiting Senior Fellow in the Regional Economic Studies Programme at the ISEAS - Yusof Ishak Institute. This commentary first appeared on ISEAS - Yusof Ishak Institute’s blog, Fulcrum.