Please download PDF using the link above for the full report
Escalation of the Iran War has evolved into significant energy price shocks and increasing risk of supply shortages for Asia, the most exposed region to Iran War. Considering the transit time, energy shortage shows up with delay, and with inventories, some of Asian economies may have felt the supply disruptions only recent week or two. How this Middle East conflict will evolve is the key for Asia economic and currency performance in Q2. The Polymarket stats show that as of 2nd, April, that 31% participants think that ceasefire will happen before the end of April, 61% thinks that the ceasefire will happen before the end of June, and 73% thinks that the ceasefire will happen by the year end. Market still have quite divergent views on the timing of ceasefire. We assume two scenarios of crude oil prices for our Asia economic and FX analysis.
Asia economies are heavily reliant on Middle East oil and gas. The specific primary energy mix, electricity generation mix, and inventories would mean uneven negative economic impact and uneven upward inflation pressure, as well as different degree of monetary policy shifts. Economies, like South Korea, Philippines, Thailand, Vietnam are likely to be more impacted. Chinese economy is to be less impacted, as it remains more anchored in coal which fuels about 58% of their total energy needs and about 58% of their electricity generation, for our scenario analysis.
Asian currencies are to be broadly shaped by the similar dominant forces in Q2, in addition to individual economy’s specific characteristics such as fiscal buffer, structural growth drivers (semiconductors) and etc. With our base case assumption of oil prices implies further increase in crude oil price in April before declining in May and June, currencies like KRW, THB, PHP and MYR likely further depreciate and with higher volatility in April, before they recover some in the remaining time of the Q2 as oil price declines. THB is likely the worst performer in Q2, as Thailand sits at the centre of the energy shock, with heavy reliance on imported oil and gas leaving the current account and inflation highly sensitive to higher energy prices, reinforced by accommodative BOT policy and cheap funding. CNY likely remains resilient in Q2, due to China’s high energy self‑sufficiency rate (84%), significant strategic reserves, and renewables/green demand. On the medium term, MYR likely is the outperformer in Asia. Strong investment momentum, resilient domestic demand, and benefits from the AI‑driven tech upcycle anchor a constructive medium‑term MYR outlook once global risks ease. More details in slides.
AGMR
