Asian countries have responded more aggressively than others to the energy supply crunch caused by the U.S. and Israeli war on Iran and now they are running out of resources to continue their response, the World Bank warned in a new report.
The report actually focuses on the potential of artificial intelligence to help Asian economies grow but names energy import vulnerability as one headwind to that growth.
“Subsidies have been by far the most common policy response [to the crisis] among emerging and developing economies,” the World Bank said, adding that “Countries with substantial subsidies in place generally have had smaller increases in retail gasoline prices than non-subsidizers, but this relationship weakened considerably for headline inflation.”
Energy remains a spot of weakness for Asian countries due to their overwhelming dependence on imports but, according to the World Bank, AI can change that by motivating a shift towards greater domestic electricity generation, which would in turn lead to lower demand for imported energy commodities.
Meanwhile, Asian countries’ response to the energy crunch has led to lower prices at the cost of lower foreign exchange reserves, the lender also said. The longer the crisis continues, the greater the effect on their fiscal health would be, the World Bank warned, noting as examples Indonesia, Thailand, and Vietnam, which saw their dollar reserves decline by between 15% and 40% since the start of the war because of their crisis response actions.
These response actions, however, have had no effect on inflation anywhere in the world, and “headline inflation has sharply increased in many countries, even as core inflation has remained more subdued.” For Asia, however, there is hope for a reversal, driven by information technology generally and AI specifically, according to the World Bank.
“The region’s dependence on AI-related industrial activity has been a source of strength, but it could become a weakness if global AI activity slows or reverses,” the institution said in its report.
By Irina Slav for Oilprice.com
