East Asia Faces Unsustainable Energy Shock Strains

East Asia and the Pacific face a growing challenge as governments struggle to sustain their response to a prolonged energy shock, according to the World Bank. The region’s economies have been hit hard by rising oil prices driven by the US-Iran conflict, leading to aggressive measures such as subsidies to cushion the blow. However, the World Bank warns that these measures may prove unsustainable, as Middle East oil exports are not expected to return to pre-conflict levels until mid-2027. The reliance on subsidies risks depleting fiscal reserves and delaying necessary adjustments in consumer behavior.

The World Bank highlights that Indonesia, Thailand, and Vietnam have seen their foreign currency reserves drop by 15% to 40% this year due to efforts to suppress retail gasoline prices. While the region’s growth outlook remains positive, with a forecasted 4.5% expansion this year, up from previous estimates, thanks to strong investment and exports driven by the artificial-intelligence boom, the energy shock poses significant risks. Higher energy costs have already impacted manufacturing and consumer demand, with transport price surges adding to the economic strain.

A longer-lasting energy shock, coupled with potential downturns in the AI sector and weather disruptions like El Niño, could further threaten the region’s economic resilience. The World Bank cautions that a renewed rise in energy prices may be more damaging than initially observed, especially as inflation and tighter financial conditions exert additional pressure.