Emerging Asian countries are particularly vulnerable to the energy shock caused by the conflict in the Middle East. Beyond supply issues, rising prices pose a significant risk to these countries, where domestic demand is a major driver of economic growth. To limit the impact, some Asian countries (notably India, Indonesia, Malaysia and Thailand) have opted to partially subsidise energy and fertilisers. The additional cost to their public finances is expected to remain manageable provided that the average crude oil price does not exceed USD 100 per barrel over the year. However, this subsidy policy poses risks to their public finances, particularly if external financing conditions tighten. Indonesia is the country most exposed to a rise in US long-term interest rates.
Rising subsidies should moderately widen fiscal deficits
Indonesia: more vulnerable to rising US long-term yields
Increased subsidies to contain the cost borne by households
In response to the sharp rise in international energy prices, India and Indonesia (whose growth is mainly driven by domestic demand) have kept pump prices fixed since the start of the conflict in the Middle East. Malaysia has chosen to exclusively keep stable the price of the fuel mainly used by households (RON 95). Meanwhile, Thailand, after leaving its prices unchanged in the early weeks of the conflict, has ultimately decided to target only the most vulnerable households and businesses by providing them with partial direct subsidies. India has also increased its fertiliser subsidies so as not to increase significantly production costs for farmers, at a time when a number of elections were taking place in states where the ruling party historically did not hold a majority.
Such a strategy will undermine the ongoing fiscal consolidation.
What would be the fiscal cost if the price of a barrel of Brent crude averaged USD 92 in 2026?
Asian countries are in a much more comfortable fiscal position than they were on the eve of the energy crisis triggered by the war in Ukraine in early 2022. At that time, they were just emerging from the pandemic and their fiscal deficits had reached unprecedented levels.
The impact on public finances of the increased subsidies introduced since the start of the conflict in the Middle East is expected to remain modest (see Chart 1) as long as the average crude oil price does not exceed USD 100 per barrel over the year. The cost is estimated at between 0.2% of GDP in Malaysia and 0.6% of GDP in Indonesia, assuming that currencies stabilise at current levels, as any further depreciation against the dollar would automatically increase the cost incurred. In India, the resulting cost from increased fertiliser subsidies and the loss of fiscal revenue caused by the reduced excise duties on petroleum products is estimated at 0.5% of GDP. India, like Indonesia, Malaysia and Thailand, has the capacity to absorb this new shock to its public finances. Nevertheless, the increase in subsidies will delay their fiscal consolidation. Indonesia’s fiscal deficit could exceed the 3% of GDP threshold set by parliament in 2026 (unless the government reduces significantly other kind of expenditures), which would cause significant concern among foreign investors.
Which countries would be most vulnerable to a rise in US long-term interest rates?
Rising bond yields are another source of risk for these countries. So far, central banks have kept their key policy rates unchanged and the rise in long-term rates has remained contained. However, a significant rise in US bond yields could change the situation. The most exposed country would be Indonesia, whose domestic market is too small to cover the government’s financing needs and offset any tightening of financing conditions on international markets.
Since the start of the conflict in the Middle East, ten-year bond yields in emerging Asia have risen less than during the war in Ukraine. The increase ranged from 0 bps in Malaysia to 49 bps in Thailand (comparedwith an average of +65 bps in 2022). However, this trend could intensify should there be a rise in US long-term rates, which would weigh on these economies via three channels: i) capital outflows ii) downward pressure on currencies and iii) an increase in debt servicing costs. The most exposed countries would be those with the highest interest burdens (India), with short maturities, debt held more widely by foreign residents (Indonesia and Malaysia) and denominated more widely in foreign currencies (Indonesia).
The country whose government is least exposed to these risks is Thailand, as its debt (64.2% of GDP) is almost exclusively denominated in domestic currency and held by residents, whilst its interest burden is low (6% of revenue).
By contrast, although modest (40.5% of GDP), the structure of the Indonesian government’s debt is viewed as the most fragile among the countries studied. Over 37% is held by foreign investors and more than 29% is denominated in foreign currency (see Chart 2). Furthermore, interest payments on its debt are already high (17.1% of its fiscal revenue in 2025), and higher than the level recorded in other countries, with the exception of India.
In Malaysia, although a significant proportion of government debt (65.3% of GDP) is also held by foreign investors (21.1% of the total), this debt has long maturities, which reduces its vulnerability to volatility in international financial markets. Furthermore, the domestic capital markets and the local investor base are sufficiently developed to finance the government’s needs.
Finally, although the Indian government’s debt is the highest (84.3% of GDP), its structure is risk-free, as it is almost exclusively denominated in local currency and held by residents. On the other hand, the interest burden on the debt is already very high (37.1% of its budget revenue), which severely constrains its investment spending. A significant rise in (domestic) interest rates represents the main risk.
