[SINGAPORE] A persistent surge in oil prices may force Asean central banks to end their monetary easing cycles in the second half of 2025, said economists from OCBC in a note on Wednesday (Jun 25).
Oil prices spiked above US$77 a barrel on Jun 20 as Israel launched strikes on Iran’s nuclear facilities, and then plunged dramatically as a ceasefire was announced on Wednesday. As it stands, Brent Crude oil futures have remained cheap, their prices dipping below pre-strike levels to around US$68 a barrel at 9 am GMT on Wednesday (5 pm Singapore time).
OCBC Asean economists Lavanya Venkateswaran, Ahmad Enver and Jonathan Ng wrote that, despite the currently lower prices, the risk of oil prices spiking once more remains. The trio projected that in a worst-case scenario, Brent prices could hit US$120 a barrel for a month, and then retrace to US$100 for the rest of 2025.
Both Iran and Israel have accused each other of breaching the fragile truce. As uncertainty continues to cloud regional tensions, Iranian officials have threatened to block the Strait of Hormuz in a tactical manoeuvre, which would close off the critical choke point through which passes more than a fifth of the world’s oil and liquified natural gas (LNG) supplies. A majority of this cargo is bound for Asian markets.
Morgan Stanley economists Chetan Ahya, Derrick Kam, Jonathan Cheung and Kelly Wang wrote in a note on Monday (Jun 23) that the current risks are akin to 2022, when oil prices shot above US$110 a barrel.
Back then, the conflict between Russia and Ukraine created supply shocks, triggering a 60 per cent rise in oil prices from US$79 a barrel in the space of four months. A blockade of the Strait of Hormuz could trigger a similar scenario.
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Under such conditions, Asean economies could face pressure across multiple fronts, the OCBC economists wrote.
Policy pivots
OCBC expects the central banks in the Philippines, Thailand and Indonesia to cut rates by 25 basis points; those in Malaysia and Vietnam are expected to cut rates by 50 basis points in the rest of the year.
But higher oil prices, coupled with trade uncertainties and weaker growth prospects, will likely make these countries think twice about doing so, said OCBC. A sudden resurgence in prices could push headline inflation higher and weigh on their balance of payments, said the bank.
“This could delay rate cuts pencilled in for the second half of 2025, until oil price risks have subsided,” said Venkateswaran, Enver and Ng.
“Trade will be the biggest channel of impact,” said the trio, in a reference to balance of payments widening on the back of more-expensive oil imports into Asean countries.
Thailand and the Philippines are the most dependent on oil imports relative to the size of their economies, the bank noted; Vietnam, Indonesia and Malaysia would face a smaller threat to their trade balances.
The bank noted that a surge in oil to US$120 could drag current account balances by as much as 0.5 per cent of Thailand’s gross domestic product, and 0.4 per cent of the Philippines’. Vietnam, Indonesia and Malaysia could expect more modest hits of 0.2 per cent to their respective GDPs.
However, Malaysia and Indonesia – being net exporters of commodities such as crude palm oil, LNG, rubber and coal – could receive a boost when rising oil prices exert a ripple effect on the prices of commodities, OCBC added.
The Morgan Stanley economists suggested in a note that a rise in prices to US$90 a barrel would still remain manageable for most Asian economies, given their macro stability. “However, as oil prices start to approach the US$110-to-US$120 range, we think this would be a meaningful stagflationary shock for Asia, given its status as a net oil importer.”
As a proportion of their respective total imports, all the Asean-5 economies except Vietnam imported more than 10 per cent worth of petroleum products in 2024. Such products accounted for 15.5 per cent of Indonesia’s total imports, which was the highest, OCBC noted in their report. (The Asean-5 are the five founding member countries of the regional grouping – Indonesia, Malaysia, the Philippines, Singapore, and Thailand.)
Higher oil prices may also pass through to domestic inflation levels by raising retail fuel prices, wrote OCBC. Based on local consumer price index baskets, the bank estimated that a 10 per cent increase in Brent would raise headline inflation by between 0.4 to 0.8 percentage points in the Asean-5 countries.
However, fiscal measures could soften such pressures considerably. Indonesia and Malaysia have introduced subsidies on retail fuel; Thailand and Vietnam maintain price stabilisation funds to manage spikes, OCBC noted.
Still, fiscal buffers could be wearing thin. Each US$10 increase in oil prices adds the equivalent of about 0.3 per cent of Malaysia’s GDP to the country’s subsidy bill, and 0.2 per cent to Indonesia’s, OCBC said.
The Philippines remains under the most pressure to hike rates from its already limited fiscal space, a widening current account balance and its sensitivity to price shocks. If oil prices hit US$120 a barrel, the country’s central bank will be forced to hike rates by 50 basis points or more from current levels, Morgan Stanley’s Asia economist Derrick Kam noted.
Indonesia is the second most likely in Asean to raise rates in that price scenario, he said. The country’s fiscal policy is bound by law to be kept under 3 per cent of the nation’s GDP, and its tax revenue growth remains weak.
“Domestic fuel prices are currently pegged to US$68 to US$73 a barrel,” Kam said. “The attendant rise in headline inflation will likely push Bank Indonesia to move off the cutting cycle and hike rates instead.”
On the flip side, Malaysia and Thailand are the least likely in the region to raise rates, since both countries face fewer fiscal risks due to policy and macroeconomic buffers, he added.
