- Asian economies have used fuel subsidies to cushion consumers from the energy shock but face growing fiscal and foreign exchange pressures.
- Indonesia, Thailand and Vietnam have seen dollar reserves fall by 15% to 40% since the start of the Iran war, according to the World Bank.
Asian economies are running out of financial resources to sustain their response to the energy supply shock caused by the US-Israel war on Iran, the World Bank warned in a new report.
The World Bank identified energy import dependence as a major risk to growth across East Asia and the Pacific. The institution also highlighted artificial intelligence (AI) as a potential driver of domestic electricity generation and reduced reliance on imported energy.
“Subsidies have been by far the most common policy response, among emerging and developing economies,” the World Bank said.
The lender noted that countries with substantial subsidies generally recorded smaller increases in retail gasoline prices than countries without subsidies. However, the relationship between subsidies and headline inflation weakened considerably.
Asian economies remain particularly exposed because they rely heavily on imported energy commodities. The World Bank said greater domestic electricity generation could reduce that exposure over time.
AI could support this shift by encouraging investment in electricity generation and related infrastructure. However, the World Bank warned that Asia’s growing dependence on AI-related industrial activity could also create new risks.
“The region’s dependence on AI-related industrial activity has been a source of strength, but it could become a weakness if global AI activity slows or reverses,” the institution said.
Meanwhile, governments have paid a financial price for cushioning consumers from higher energy costs. The World Bank said Asian countries have reduced the impact of the energy shock on consumers while depleting foreign exchange reserves.
Indonesia, Thailand and Vietnam provide notable examples. Their dollar reserves declined by between 15% and 40% since the start of the war as governments responded to the energy crisis.
The World Bank warned that prolonged energy disruptions could place further pressure on government finances. Higher import costs and continued interventions could also reduce governments’ capacity to respond to future economic shocks.
However, the measures have not eliminated inflationary pressure. The World Bank said headline inflation has increased sharply across many countries, even as core inflation remained more subdued.
The report also linked Asia’s longer-term outlook to developments in information technology and AI. Increased domestic power generation could strengthen energy security while supporting the region’s expanding digital economy.
However, the World Bank cautioned that a slowdown in global AI activity could expose economies that have become heavily dependent on AI-related manufacturing and investment.