Middle East conflict could revive debt stress in emerging Asia, Moody’s warns

A prolonged or wider conflict in the Middle East could intensify pressure on emerging Asian economies that have previously struggled with external debt repayment, Moody’s Analytics said, warning that renewed energy shocks may revive financial stress in the region.

In a commentary on the implications of the conflict for Asia-Pacific economies, the firm noted that the surge in energy and food prices following Russia’s invasion of Ukraine contributed to economic crises in Sri Lanka, Bangladesh and Pakistan. A sustained disruption to Gulf oil exports or maritime trade routes could trigger similar concerns.

The conflict escalated over the weekend after the United States and Israel carried out strikes on targets in Iran. Tehran responded with missile and drone attacks aimed at Israel and countries hosting U.S. forces, including the United Arab Emirates, Qatar, Kuwait, Bahrain, Iraq, Jordan and Saudi Arabia.

Moody’s said media reports indicate the Strait of Hormuz, a critical oil transit route, has effectively been closed, increasing the risk of wider disruptions in the Red Sea and across the Middle East. Airspace closures have also affected passenger travel and cargo flows through a major global trade corridor.

Around one-third of global seaborne crude oil exports pass through the Strait of Hormuz, largely destined for Asian economies such as China, India, Japan and South Korea. About 20% of global liquefied natural gas shipments also transit the route.

Brent crude rose to around $80 per barrel in early Monday trading in Asia, compared with about $72 at Friday’s close, while equity markets declined. The firm said the escalation adds uncertainty to the global trade outlook.

China, a major buyer of Iranian crude, holds substantial reserves that could help cushion short-term supply disruptions. However, renewed tensions with the United States may complicate upcoming bilateral engagements and affect trade stability.

India also faces challenges due to its dependence on Middle Eastern oil and its agreement to reduce Russian oil imports under a trade arrangement with Washington. The situation has been further complicated after the U.S. Supreme Court struck down country-based tariffs introduced by President Donald Trump.

Moody’s said high-income Asian economies including Japan, South Korea, Taiwan, Singapore and Hong Kong are particularly exposed, as they import more than 80% of their energy needs and rely heavily on food imports.

Higher commodity prices could increase consumer and producer inflation across the region, potentially limiting central banks’ ability to ease policy. Rising import bills may widen trade deficits and put downward pressure on regional currencies through increased financial outflows, it added.