How Asia Is Addressing Instability in the Middle East
We assess the impact of the Middle East conflict on Asia, highlighting potential scenarios, the region’s responses, and fundamental strengths.
With over 80% of the energy exports passing through the Strait of Hormuz destined for Asian markets,1 the outbreak of hostilities between the US, Israel, and Iran and the subsequent reduction in sea traffic have triggered an energy supply shock. However, the economic sensitivity to energy prices varies, with certain markets, such as the Philippines and Thailand, highly dependent on crude oil and gas imports. In contrast, others, such as China, have a more diverse energy supply chain. Indeed, some markets, for instance Malaysia, may even benefit from price increases because they are a net energy exporter.
Energy and Fertilizers: A Major Concern for Some Markets
The potential economic impact of the conflict on Asian economies will ultimately depend on how severely energy exports through the Strait of Hormuz are curtailed. A prolonged shortage of natural gas for fertilizer production could ultimately lead to food price shortages and price spikes later in the year. Markets that are more dependent on urea – an important fertilizer in India, for instance – will be heavily affected.
At the time of writing, farmers in India are already seeing fertilizer prices rise, despite the government announcing that ample supplies are available. The World Food Programme has warned that an additional 45 million people globally, 9.1 million of whom live in Asia, could face food insecurity if the conflict has not ended by June.2
Tourism Sector Faces Challenges
Airspace closures in the Middle East could also reduce the number of Asia-bound tourists, especially those transiting through major hubs such as Dubai and Qatar. Those Asian markets where tourism accounts for a considerable proportion of gross domestic product (GDP) growth will be more negatively affected by any prolonged downturn in visitor numbers. In the Philippines, for example, 23% of all employment is in the tourism sector, and it accounts for 19% of GDP.
Energy-Related Inflation May Keep US Interest Rates Higher for Longer
Elevated gasoline prices in the US are already expected to push up inflation, which may prompt the US Federal Reserve (Fed) to increase interest rates. Any such rise may reduce Asian central banks' ability to cut their own rates to support their domestic economies.
An alternative scenario is that higher pump prices lead to reduced economic activity, as consumers must cut spending in other areas. In turn, this could lead to higher unemployment, prompting the Fed to consider cutting interest rates to stimulate the economy.
The Response of Asian Governments
The measures taken by policymakers vary across the region but fall into three categories: demand management, supply management, and financial support in the form of subsidies, price caps, or reduced taxation on certain types of fuels.
Demand Reduction Measures
The Philippines was first in the region to declare a national emergency owing to the closure of the Strait of Hormuz. The Philippines imports 95% of its crude oil requirements from the Middle East, although its neighbors supply finished petroleum products.3 This makes it particularly sensitive to supply and price shocks, especially when other territories, like China, have imposed bans on exporting fuel to preserve and bolster their own supplies.
Work-From-Home to Reduce Demand
In Malaysia, the government will offer a three-day work-from-home (WFH) arrangement to any civil servant who lives more than eight kilometers from their workplace.4 Indonesia is also offering its civil servants a WFH option to try to reduce the use of private vehicles. Elsewhere, Thailand’s office workers have been encouraged to wear T-shirts instead of suits to reduce air conditioning and save electricity.5
Temporary Supply Measures Introduced
While some products can only be made from crude oil, liquefied natural gas (LNG), or their byproducts, electrical energy can be produced by switching to alternatives like coal. South Korea, Thailand, and Indonesia have temporarily permitted increased coal-powered electricity production.6 These steps are seen as a short-term measure that, while not in line with longer-term emissions-reduction commitments, will lessen the impact of supply problems in the short term.
Regional Financial Support
To lessen the impact on consumers and industry of higher energy prices, governments have introduced price caps, fuel price subsidies, and tax reductions on fuel. For example, Indonesia, Thailand, and Vietnam have all announced either direct subsidies or a temporary cut in excise taxes on fuels.
Added Impetus for Governments to Source Alternative Supplies of Energy
The energy supply issue has prompted governments to intensify efforts to diversify their power sources, accelerate the use of renewables in their energy mix, and reduce dependence on energy imports. Vietnam has signed a new cooperation agreement with Russia to help it develop two new nuclear plants.7
China has long been adjusting its energy mix to cope with any price and supply shocks. It has ensured that its oil sources are well diversified with no more than 20% from any one location.8 The rapid adoption of electric vehicles (EVs) in China since 2020 has reduced demand for petrol and diesel. In 2025, half of all new vehicles sold in China were electric, and it has been estimated that this reduced demand for crude oil by about one million barrels per day.9 Domestic gas production has also been prioritized, further reducing their reliance on energy from the Middle East.
Fundamental Resilience
As Asian markets have matured and grown over the past two decades, their performance during financial crises has steadily improved. In contrast to Asian equity markets, which experienced some sharp declines in response to the conflict, bond markets have proven more resilient despite investor outflows. This is due in part to the lower-risk fundamental characteristics of bonds compared to equities and to the positive development of the Asian bond market, which has increased investor confidence in the asset class.