Asian economies are grappling with renewed inflation and fiscal challenges as Brent crude oil prices surged past $100 a barrel, reaching over $107 on Friday due to increased attacks in the Strait of Hormuz and geopolitical tensions between the US and Iran. This surge impacts major oil importers like Japan, South Korea, and India, while also increasing the cost of fuel subsidies for countries such as Indonesia and Thailand.
The Asian Development Bank (ADB) has revised down its growth forecast for developing Asia and the Pacific to 4.9% for 2026, a decrease from 5.5% in 2025, and a 0.2 percentage point reduction from April projections. Inflation is now projected to rise to 4.3% in 2026, up from 3% in 2025, reflecting persistent inflationary pressures from higher energy prices, supply chain disruptions, and increased freight costs stemming from the Middle East conflict. The ADB anticipates these disruptions to unwind only gradually.
The conflict's economic impact extends beyond oil, affecting global supply chains, increasing import prices, and leading to stockpiling behavior. These factors are feeding into producer and consumer prices across Asia, potentially keeping inflation elevated for many months even if energy markets stabilize. Fiscal pressures are also worsening in several developing Asian economies due to increased costs for fossil fuel subsidies, with countries having large existing subsidy programs facing the greatest risks. The ADB advises governments to prioritize targeted assistance to vulnerable groups over broad-based fuel subsidies to maintain fiscal sustainability and encourage energy conservation.
