Qatar National Bank (QNB) expects that the repercussions of the military escalation between the United States of America and Iran on financial conditions, foreign exchange reserves and food security will continue for a longer period, even after the end of the crisis, for most border and emerging economies in Asia.
The bank indicated in its weekly report that Asian central banks face a complex task of achieving a balance between supporting declining economic growth and reducing inflationary pressures.
The report pointed out that the energy crisis in Asia will not end once an agreement is signed between the United States and Iran, but rather when supply chains, reserves, and price levels in the region return to fully normal.
He added that the military escalation between the United States and Iran caused one of the largest shocks to energy supplies in history, as a result of the closure of the Strait of Hormuz and the disruption of about a fifth of global trade flows of oil and liquefied natural gas.
The report indicated that, as a result, Brent crude prices recorded a peak of $118 per barrel, before falling to less than $80 per barrel in mid-June with the emergence of signs of a ceasefire, while global oil inventories continued to decline at a rapid pace.
Asia is one of the regions most affected by this major disruption in energy supplies, as about 80 percent of its crude oil imports and 90 percent of its liquefied natural gas imports usually pass through this vital sea corridor.
The report reviewed the response of governments across Asia through emergency measures that have not been seen since the Covid-19 pandemic, which included rationalizing fuel consumption, adopting four-day work weeks, restarting coal plants, and withdrawing record amounts of strategic oil reserves, which raises questions about continuing inflationary pressures on the continent.
The report discussed the repercussions of the escalation on advanced and emerging Asian economies, and analyzed its repercussions on inflation, as withdrawal from strategic oil reserves in various parts of Asia formed the direct line of defense in the face of the supply shock.
He stated that Japan and South Korea, which usually obtain 95 percent and 70 percent of their oil needs from the Middle East, respectively, have strategic reserves equivalent to supplies sufficient for about 30 weeks, while China, despite being the largest importer of crude oil in the world, is still able to access Iranian and Russian energy supplies via routes that do not pass through the Strait of Hormuz, and it can also switch to local coal to generate electricity.
Qatar National Bank (QNB) considered in its weekly report that the options of most other Asian economies appear limited compared to China.
The report explained that India, Vietnam, Singapore, Bangladesh, Pakistan and Sri Lanka possess limited strategic reserves sufficient for a period ranging between 30 and 90 days, pointing out that the last countries in this group face greater risks, in light of limited foreign exchange reserves and limited financial space, which reduces their ability to absorb a supply shock.
The report indicated that the repercussions of the energy shock on inflation are transmitted through three main channels simultaneously, the first and most rapidly affecting of which is the direct impact of the rise in oil and gas prices on fuel, electricity and transportation costs, which is evident in the rise in container shipping costs, gasoline queues, increased electricity tariffs, and aviation fuel fees throughout the region.
He added that the second channel is the prices of food and fertilizers, as disruptions to petrochemical supply chains led to a decline in the availability of raw materials for fertilizers derived from liquefied natural gas, which raised the costs of agricultural inputs and threatened food security in South and Southeast Asia.
He pointed out that the third channel is the decline in the value of currencies, as the rise in energy import bills in Asian economies led to a deterioration in trade balances and an increase in capital flows abroad, which weakened the currencies against the US dollar and increased import price inflation beyond the direct impact of the rise in energy costs.
The report confirmed that the impact of these three channels occurs simultaneously, which exacerbates inflationary pressures in the region, which are expected to reach 5.2 percent during the current year, compared to 3.0 percent last year.
At the conclusion of its analysis, the bank believed that the announcement of an agreement between the United States and Iran inspires a degree of cautious optimism, but it stressed that any quick solution will not immediately lead to stability in prices and supplies.
He expected that it would take until early next year for production and trade patterns to return to pre-escalation levels across Asia, noting that clearing mines, resuming cross-strait logistics services, and restarting halted production fields may require months of continuous efforts.