Subsidies, tech boom cushion Asia oil shock

Nearly six months after the United States and Israel began military strikes on Iran, sending crude prices to record highs and snarling shipments through the Strait of Hormuz, much of the Asia-Pacific has managed to keep inflation contained, analysts said.
Government spending and domestic energy supplies have helped blunt the blow, while strong demand for semiconductors and artificial intelligence products has supported growth.
But the resilience is uneven: economies more reliant on imported oil are showing strain, raising questions about how long subsidies and tech demand can offset the fallout from the Middle East conflict.
With the Asia-Pacific being a “central part of the global AI supply chain”, AI products and semiconductor exports have become the “dominant driver” of regional growth, according to Joshua Lewin, head of investment strategy, Asia at JP Morgan Private Bank.
But Lewin said in his latest research report that the benefits from the AI export boom are “far from evenly distributed”. He said China, Singapore and South Korea — economies that have “stronger positions” in the AI supply chain — are primary beneficiaries. But India, Indonesia and the Philippines have captured fewer gains due to their limited integration into the hardware and semiconductor supply chain.
China’s economy expanded 4.7 percent in the first half of 2026. The National Bureau of Statistics said the economy withstood pressure and operated within a reasonable range in the first half, with new quality productive forces gaining momentum.
The AI boom has likewise bolstered GDP growth in Singapore and South Korea in the first few months of the year. Singapore’s economy rose by 6.1 percent in the first half of the year while South Korea’s GDP increased by 1.8 percent in the first quarter.
Jason Chang, chairman of the Australian Chamber of Commerce in Hong Kong, said the Middle East war affects each Asian economy differently, with the impact depending on whether crude oil or energy is a big part of their respective import bill.
Most Asia-Pacific economies depend on the Middle East for their energy sources, importing more than half of their crude oil from the region. The escalating crisis in the Middle East has reduced energy production, disrupted transport in the Strait of Hormuz and pushed oil prices to multi-year highs. Brent crude, the international benchmark, neared $120 per barrel on March 9 after the war started in the Middle East on Feb 28.
Chang said Asian economies that are net energy exporters can offset the shock brought by the Middle East crisis, but those that rely heavily on imported oil and gas have to deal with higher domestic inflation rates. He cited Australia, which has managed to cushion the impact of steep oil prices as the Pacific country is one of the world’s largest exporters of liquefied natural gas.
Australia’s economy grew 2.5 percent in the first quarter of 2026 thanks to business investment in data center machinery and equipment, according to the Australian Bureau of Statistics. The nation’s consumer price index eased to 3.8 percent in the year to June, from 4.0 percent in the 12 months to May.

In India, Asia’s third-biggest economy and one of the world’s biggest crude oil importers, GDP growth eased to 7.8 percent year-on-year in the three months to March, from 8.0 percent expansion in the preceding quarter. Rating agency ICRA forecast that growth would slow to 7.0 percent in the three months to June, which marks the first quarter in the nation’s current fiscal year that began in April, while fiscal full year 2026-27 growth is pegged at 6.7 percent due to weak monsoons and prolonged geopolitical conflict posing downside risks.
Shumita Sharma Deveshwar, chief India economist for the London-based consultancy TS Lombard, said India’s dependency on crude imports has weighed on the rupee, making it one of the worst performing currencies this year.
“Structurally, even before the war broke out, the rupee had been declining. The big reason for that is also that foreign investors have largely been missing from India’s high growth story,” Deveshwar said.
In Indonesia, Southeast Asia’s biggest economy and a net energy importer, domestic fuel subsidies have reined in inflation, analysts said. The economy grew 5.45 percent in the first half of the year on increased government spending and expanded accommodation and food service activities. The inflation rate slowed to 2.88 percent in July — the lowest in three months.
Harry Baskoro, a former senior deputy director at Bank Indonesia, the central bank, said that the fuel subsidies have ensured that the international oil shock does not pass immediately into consumer inflation.
“Fiscal policy is being used as an economic shock absorber, but the absorber has a price,” Baskoro said.
He said subsidies keep local fuel prices relatively stable, but part of the cost migrates to the government budget through higher subsidies and compensation. A prolonged increase in oil prices will also raise Indonesia’s foreign exchange requirement for energy imports. Baskoro said if that coincides with global risk aversion and capital outflows, pressure on the rupiah can amplify the imported-inflation effect.

Arsjad Rasjid, chairman of the Board of Trustees at the Indonesian Business Council, said the subsidies support households and businesses, giving them time to adjust and reducing the risk of an energy shock spreading too quickly through transport, food distribution and the wider economy.
“The bigger question is how Indonesia uses that time. Over time, support needs to become better targeted, so protection can remain where it is most needed while preserving fiscal space for productive investment and other national priorities.”
Rasjid said the Middle East crisis has exposed Indonesia’s vulnerability to imported oil. While sourcing outside Gulf countries and extending fuel subsidies can help cushion the impact of higher oil prices, Rasjid noted that these are not sustainable over the long run.
“The real task is preparing for the energy transition,” he said, citing the Indonesian government’s target to boost solar energy to replace diesel generation.

Country-specific factors
Lewin of JP Morgan said the economic outlook for the region in the next few months will depend on “country-specific factors”. In some South and Southeast Asian countries, for example, Lewin said balance-of-payments pressures may persist even if oil prices stabilize as the energy shock exposes deeper structural vulnerabilities.
Rasjid said investors should treat “continued volatility as the base case” in the coming months.
He said the more serious downside would be a combination of shocks: another sustained rise in energy prices, renewed disruption to major shipping routes and tighter global financing conditions.
Baskoro said the Middle East crisis could also accelerate diversification among Asia-Pacific economies. He said this would push governments and companies to reduce dependence on one supplier, one shipping route or even one type of energy source.
“That potentially raises Southeast Asia’s strategic value as an alternative production, processing and logistics base,” Baskoro said.
He said Singapore can benefit from its role as a trading, refining, shipping and financial hub. Indonesia, meanwhile, can move from being primarily a supplier of commodities to becoming part of Asia’s energy security infrastructure: LNG and gas networks, biofuels, renewable power, battery and critical-mineral supply chains, refining and processing, shipping, and eventually greater cross-border electricity connectivity.

Leonardus Jegho in Jakarta contributed to this story.

prime@chinadailyapac.com