The Strait of Hormuz has been largely closed for months, and its fate remains unclear, creating huge problems for Southeast Asian economies that rely on it for deliveries of oil and fertiliser. This year's El Niño could only make things worse, according to United Nations experts warning of a 'compound shock effect.'
Immediate Impact on Southeast Asia
When the US and Israel launched the war on Iran, Southeast Asian nations were amongst the first and hardest hit, as the closure of the Strait of Hormuz cut off supplies of energy and fertiliser. Governments across the region, heavily reliant on the waterway, raced to find ways to reduce their fuel use. In the Philippines, many government workers were put on a four-day week. In Vietnam, employers were urged to allow staff to work from home. In Thailand, offices were urged to set air-conditioning units to 27°C.
Fragile Optimism After Iran Peace Deal
Southeast Asian governments last week expressed hope that the Iran peace deal would bring freedom of navigation through the strait and economic stability. However, that optimism looks fragile as on Saturday Iran indicated it would close the strait after Israeli strikes in Lebanon, and planned to introduce a system of maritime fees. Now, United Nations experts are warning of a 'compound shock effect' arising from the economic fallout from the conflict combined with looming 'Godzilla strength' El Niño conditions in Asia and the Pacific, which could put millions of tonnes of the world's food at risk.
Agriculture at Risk
Agriculture has been the backbone of Southeast Asia's economy and contributes almost one tenth (9%) of global agricultural exports. The region's dependence on Middle Eastern oil and fertiliser makes it particularly vulnerable. According to the International Energy Agency (IEA), before the crisis, 60% of Southeast Asia's imports of crude oil and a third of its imports of gas came from the Middle East. The region's energy import bill is projected to reach $160bn this year – double the $80bn bill in 2024, with predictions it could reach $245bn by 2035.
What Is Happening in the Strait of Hormuz?
The US has lifted its blockade of Iranian ports in the Gulf, but the fate of the Strait of Hormuz remains uncertain as peace talks continue. Iran has threatened to close the strait if Israel keeps up its attacks on Hezbollah in Lebanon and has announced plans to introduce a system of maritime fees after the 60-day negotiating period has ended. The world's main shipping watchdog, the International Maritime Organization, has already said any toll would set a 'dangerous precedent.' Henning Gloystein, managing director for Energy, Climate and Resources at Eurasia Group, said Southeast Asian nations would club together with other countries across Asia and also in Europe to find an alternative.
Fertiliser and Food Price Hikes
The region is also dependent on fertiliser imported from the Middle East. The United Nations' Food and Agriculture Organization (FAO) estimated this month that about 3.3 million tonnes of rice production across Asia and the Pacific are already at risk due to reduced fertiliser use. Higher energy and fertiliser costs are pushing up food prices across the region. For example, in Myanmar the average cost of a basic food basket has increased by 19% since late February, while the price of fish like tuna has surged as many fishermen cannot afford the fuel to take their boats out. Steven Okun, chief executive of geopolitical strategy firm APAC Advisors, said any fees imposed on transit through the strait will lead to higher prices in Asia. 'Whether it is called a toll or user fee, [it] raises insurance and shipping costs, which flow straight through to fuel prices – and import-dependent economies in Southeast Asia will be hit,' Okun said.
El Niño Compounds the Crisis
The US National Oceanic and Atmospheric Administration in June declared that El Niño conditions were now under way in the tropical Pacific, which experts had predicted would have dire consequences for agriculture. In a report released on Wednesday, the UN's FAO said its 'greatest concern' lies in the interaction between the emerging El Niño and the market pressures stemming from the Middle East crisis. 'When both factors are considered together, FAO estimates that 7–8 million tonnes of rice production could be at risk under a scenario involving a partial closure of the Strait of Hormuz, in Asia-Pacific,' it said. Thailand – with its strong signs of an emerging drought and substantial exposure to global energy and fertiliser price increases – 'stands out as the clearest example of compound risk,' the report stated, followed by Indonesia, the Philippines, and several Pacific Island countries.
Global Implications
Maximo Torero, chief economist at the FAO, said the effects would not be confined to Asia and the Pacific if millions of tonnes of food production are at risk. 'The impact may not appear as an immediate physical shortage everywhere, but as higher food import bills, tighter supplies, reduced farmer incomes, lower purchasing power and increased pressure on vulnerable households,' he said. 'The shock is global because it moves through energy, fertiliser, freight, food prices and trade channels.' The situation also has an impact on wider international relations, especially if, as Okun says, other geographical chokepoints 'become weaponised.' Southeast Asia's energy vulnerability has also given an opportunity to Russia – once a global pariah due to the Ukraine war – to boost ties with the region, with analysts saying Moscow presented itself as a 'third power' option between China and US at a summit in Kazan last week. The summit saw Vladimir Putin secure a raft of energy-related agreements including a framework for cooperation with Laos in the peaceful use of nuclear energy, while also providing assurances to Malaysia on oil, gas and diesel supplies.
