The Decisive | Season 7 | Ep.13 - AI Tailwinds, Energy Headwinds: Asia-Pacific's Economic Balancing Act

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Kristen Hallam:

You're listening to The Decisive Podcast, insights and analysis to empower confident decision-making. Hello and welcome to The Decisive. I'm your host, Kristen Hallam. With me today is Ahmad Mobeen, Principal Economist for S&P Global Market Intelligence. Ahmad analyzes and prepares forecasts for Asia-Pacific economies, including Singapore, Indonesia, Pakistan, and Bangladesh. Asia-Pacific is facing a complicated economic picture. Rising energy and food costs are weighing on the outlook, while AI investment, electronics exports, and domestic demand are providing important sources of resilience. Ahmad is going to help us unpack the risks and opportunities here.

Ahmad, welcome to The Decisive.

 

Ahmad Mobeen:

Thank you very much for having me.

 

Kristen Hallam:

So Ahmad, Asia-Pacific is facing a tougher external environment, but the regional slowdown is expected to be neither uniform nor severe. What is the big picture for APAC growth and what explains the region's continued resilience?

 

Ahmad Mobeen:

Thank you. So the big picture is that the growth in Asia-Pacific is slowing, but it is not a synchronized or a severe slowdown. So our forecasts still point to a regional growth of 4.3% this year and 4% next year in 2027. So still strong, but down compared to 4.4% in 2025. So I would say that the direction is a bit softer as we expect a slight slowdown in the last quarter of '26 and a bit further moderation in 2027. But the region overall still remains one of the stronger growth engines globally. Now, as we know that APAC, as other regions, is being hit by several external headwinds at the same time.

First, the Middle East escalation and related shipping risks are keeping the energy prices, freight costs, and also insurance costs elevated. And that then raises the input costs for manufacturers and also the retail final prices for end consumers. And then concurrently, we also have tighter global financial conditions in the form of rising sovereign yields, which are having impact on capital outflows, especially in developing markets, and also a lot of fluctuations and weakening in the exchange rate and currencies. And then we also have government finances that are a bit shaken by all these shocks, and the ability to finance further fiscal support has also weakened, especially again for the emerging markets. And then on top of it, we also have the slowly expanding impact of the current El Niño conditions, which by some estimates is turning out to be the most severe on record. And this then raises risks for elevated food price inflation, as well as deteriorating crop outlook for the region, especially for the South and Southeast Asian economies. But having said that, as you mentioned, there is resilience as well.

And I would say it is coming out of three main sources. So first is the AI-led technology upcycle that is supporting exports and investments. And economies in the region linked to semiconductors, electronics, data centers, and also investments in digital infrastructure, they're all benefiting from strong external demand. Second is that several economies still have solid domestic demand momentum here, and I would specifically highlight India and Indonesia as good examples here because in those economies, consumption, investment pattern, and also domestic government spending, they are still strong and helping offset the weaker external conditions rising from the external headwinds that I mentioned. And third, there is still policy support in part of the regions. For example, mainland China has introduced strong measures to support their infrastructure investments, also to shoulder their property sector and also high-tech sectors. Malaysia also comes in mind because the government there in the 2027 budget also announced significant supporting stimulus to help increase wages, also to upgrade skills for the workers, and also help adopt technology more increasingly. So the key point, just to summarize, would be that APAC is not moving as one coherent bloc.

Tech exporters are performing better. Domestic demand-dependent economies are also holding up, but now facing, of course, increasingly more policy constraints. And agriculture-heavy economies, they're now more exposed to food inflation because of El Niño. And that unevenness, I would say, is really the defining feature of the outlook.

 

Kristen Hallam:

All right. Thanks, Ahmad, for that big picture overview. And as I said in the intro, we are going to unpack this a little bit. So let's start with the electronics exports that you mentioned there. So the AI investment cycle, which we've discussed in a previous episode, and strong electronics exports are helping several APAC economies offset higher energy costs and weaker domestic demand, as you mentioned. How durable is that support, and which economies are best positioned to benefit as we move into 2027?

 

 

Ahmad Mobeen:

Yes, so you're totally right that the AI and electronics cycle has been one of the most important cushions for Asia-Pacific this year, and it has helped offset majorly the drag from, as I mentioned, higher energy costs, weaker household purchasing power, and also tighter financial conditions. In terms of durability, I would describe this support as still meaningful, but it is increasingly facing headwinds now because the demand for semiconductors, servers, data center equipment, and also associated electronics manufacturing, it still remains strong for now, especially the AI-related capital expenditure. It is still flowing through the trade channels, the manufacturing channel, and also the investment channel. And that is why the APAC economies, specifically South Korea, Taiwan, Singapore, Malaysia, and also Vietnam. They have been having among the relatively outperformers, but for South Korea and Taiwan, they are benefiting most directly from semiconductors and advanced electronics demand. For Singapore, I would say it's benefiting more through the high-value manufacturing channel and also the related services and regional investment flows. And Malaysia and Vietnam, they're benefiting through electronics assembly and also manufacturing supply chains and foreign direct investment into data centers.

Moving into 2027, I would say that the question would be whether this investment boom in AI and also the exports momentum remains broad-based or becomes more selective in nature. So if global technology demand continues to expand, then these economies should remain well positioned. But I would say that there are two major risks to look out for. The first would be normalization. If the very strong pace of AI-related demand begins to cool, then the export momentum for these economies will also soften. And that is in fact incorporated in our base case scenario as well for a soft moderation in 2027. And the second would be financing. So AI investment is very capital intensive, but as we are witnessing now, if global interest rate environment and also rising bond yields, they stay elevated, then some projects would face higher funding costs or even delays.

And also an interesting element that we are witnessing in APAC, especially when it comes to AI exports, is the divergence in volumes versus the value of exports. With volumes, or quantum, of exports, it is starting now to moderate a little, but the elevated prices of such materials, that is helping, keeping the momentum alive in nominal dollar terms. So that is why the dollar value remains strong for now. But the momentum in the quantum is moderating now. So I would not say that the AI cycle removes the downside risks. It is more at the moment like cushioning them. And there is still material consideration about a potential slowdown come the second half of 2027.

 

Kristen Hallam:

Okay, good points there, Ahmad. And let's talk more about those downside risks. So conflict, And shipping risks in the Middle East and the Red Sea are keeping oil, freight and insurance costs elevated. How are those pressures flowing through APAC economies, and where is the exposure greatest?

 

Ahmad Mobeen:

Very important question. So I would say that the transmission is happening through 3 major channels. The first, and of course most direct, would be energy prices. Because APAC has many large net energy importers, so higher oil and gas prices, they quickly raise the import bills. And then that rising import bills, it affects fuel, electricity, transport prices, and also manufacturing costs. And the second related channel because of the disruptions is the shipping and insurance channel. So when trade routes through the Middle East or the Red Sea, or more specifically Strait of Hormuz, if they're now becoming riskier, then freight rates and insurance premiums, they tend to rise and they have been on elevated levels for quite some time now. And that again then impacts APAC economies, especially the export-dependent ones, because the region is deeply integrated into the global goods trade, merchandise trade, especially the export-oriented ASEAN bloc, where the trade-to-GDP ratio averages well over 100% of GDP and is actually more than double the overall global average.

In other words, like even if the production there is not directly disrupted, the cost of moving goods rises, and then that also creates risks for downside output and also for elevated inflation. And the third channel would be inflation and currency or exchange rate pressure. So higher import costs would, of course, widen the current account deficit for most of the economies and also the external financing needs for some of these economies. Especially those which are more dependent on foreign investments. And at the same time, as I mentioned before, that higher US yields and also safe haven demand for US dollar, it is rising and that puts pressure on regional currencies, especially those of emerging markets. And then currency weaknesses then raise the local currency cost of that imported fuel, the imported food, and also the imported intermediate inputs. So it is two trends reinforcing each other. So in terms of economies, I would highlight the Philippines.

It is exposed through both the fuel and food inflation channel and also the exchange rate weakness. Indonesia is also exposed through imported inflation and also the weaknesses in rupiah recently, which dropped to historic lows, and also the capital outflows and volatility seen there in the stock market. India also is worth mentioning because the higher oil import bill and also the fuel price pass-through is impacting the economy, even though the domestic demand still helps offset some of this impact. And then the fiscally fragile economies of South Asia— Pakistan, Bangladesh, Sri Lanka— they're also highly vulnerable because external financing conditions and also rising import costs, they matter significantly for their macro stability, especially considering their fragile external and fiscal buffers there. So overall, for businesses and for investors, I would say that it is not just a commodity price story, but it is a combination of multiple headwinds from higher input costs to logistic disruptions to currency weakness, and also now a higher interest rate environment.

 

Kristen Hallam:

So let's drill down a little bit on India and Indonesia. Now, these two economies are both drawing support from domestic demand. but they face different vulnerabilities. How do their outlooks compare, particularly around inflation, currencies, and the room policymakers have to respond?

 

Ahmad Mobeen:

Yes. So the good news for APAC is that the growth outlook for India and Indonesia, despite the external headwinds, is showing resilience in both economies. But at the same time, of course, they are not immune to the risks, and the sources of the risks here are relatively different. So India remains one of the strongest growth stories in APAC. It is being supported by the domestic sector, especially household consumption, strong public investment, of course, also the digital infrastructure spending by the government, credit growth from the financial channel, and also the continued investment momentum. So the underlying demand story is strong. But the main vulnerability right now for India is inflation, particularly food inflation, because due to the El Niño weather pattern and also the weaker monsoon conditions, that could put pressure on staple food prices. And because food has such a large weight in the consumer basket of India, that can quickly affect household purchasing power and also inflation expectations.

 

Then capital outflows and rupee weakness is another channel. So the Reserve Bank of India, the central bank of India, has been trying to prevent a severe rupee slide for nearly a year now, introducing a lot of measures to attract foreign capital. But those are helping for now. But of course, the momentum and the stability of it is still to be seen, especially with headwinds remaining strong. On the other hand, Indonesia's growth story is similar in that the domestic momentum is helping cushion the external vulnerabilities. But those vulnerabilities for Indonesia are a bit more concentrated around the currency channel, around the financial market confidence in particular, because Indonesia recently faced a very visible financial market shock. So MSCI recently warned that Indonesia's equity market, it could be downgraded from emerging market status to a standalone market status because of multiple concerns around opaque trading there and also possible coordinated trading practices. And that warning then triggered a very sharp two-day stock market sell-off around mid-October.

And that was, by some records, Indonesia's deepest ever two-day sell-off in the market. And that again then added to the pressure on investment sentiments, which were already high given the vulnerability in Indonesia's fiscal sector and also transparency issues about its new sovereign wealth fund, Danantara. Now, authorities there have responded by strengthening market supervision measures. The regulators have also signaled that they will take tougher action against any kind of suspicious trading, like investigations and also potentially freezing investor accounts, those that are suspected. So overall, I would say that while India's main vulnerability is more food- and inflation-led, and Indonesia's is more currency, capital flows, and also market confidence-led. But the difference is more relative, not an either-or. An important qualifier here for India would be that it is, of course, not immune to currency and capital flow risks as well. The rupee has been exposed to fluctuations in the commodity prices, a stronger US dollar, and also portfolio outflows.

 

Kristen Hallam:

Right. Thanks for that, Ahmad. So higher energy and food costs, currency weakness, tighter global financial conditions. These are all creating trade-offs, difficult trade-offs, for central banks. How much divergence should we expect in monetary policy across the region, and which economies may have the hardest decisions ahead?

 

Ahmad Mobeen:

This is a very pertinent question. So inflation pressures across the region are generally rising. But those are driven mainly by energy right now, food, and then of course the second-round impacts into transport prices and also as well as imported raw material prices, imported intermediate goods, and also currency weaknesses. And this backdrop is making central banks more cautious, particularly after the Federal Reserve's recent hike in its interest rates and potential signaling that further tightening remains possible there. So several regional central banks in APAC have flagged this as a key watchpoint in their communication. Now, in terms of different markets within APAC, so the Bank of Japan recently raised rates as inflation is becoming more persistent, and that marked a shift towards faster tightening. And that was the shortest interval, in fact, between hikes for the Bank of Japan since March of 1990. And in our base case scenario, we do expect another hike likely in December. So before the end of this year in 2026.

The Philippines also tightened because the inflation pressures are also persistent there, and also they're facing significant weaknesses in the exchange rate. Then Australia raised their policy rate to a 15-year high. It was the 4th hike this year. So it was mainly to counter the energy-driven imported inflation, and also the central bank there signaled the possibility of further increases as well. Then the Reserve Bank of India, it also increased its repo rate by 25 basis points recently to 5.5%, and that was its first hike since February of 2023. And in our base case, again, we do expect that this likely marks the start of a calibrated tightening cycle there as well, because inflation, as I mentioned before, it's rising, especially in food and fuel, and then it's also broadening further owing to the second-round effects of those supply shocks. Then the Bank of Korea and also the Monetary Authority of Singapore, they also started acting from spring as well to make their policies more tightened. So the basic challenge now for central banks is that many of these shocks in terms of origin, they're supply-side shocks like higher oil prices, El Niño-related food prices, and of course freight costs because of the trade disruptions.

And they're not easily countered by monetary policy tools or instruments. And monetary policy decisions also then have a transmission lag as they seep through the financial channels, and that is even more pronounced in developing economies. So overall, the tightening cycle remains calibrated for now in APAC, and the central banks continue to assess the impact of these shocks, especially as they become more prolonged.

 

Kristen Hallam:

Now, you mentioned El Niño earlier. We had an entire episode of the podcast dedicated to that topic, which was taken from the client webinar on which you appeared. But following up on that, as you said, it is emerging as a major risk, especially for agriculture-heavy economies. Why is food such an important transmission channel in the region?

 

 

Ahmad Mobeen:

So food is one of the fastest ways that any kind of shock like El Niño can impact or move into the broader economy in terms of its impact, especially in APAC. So there are multiple reasons for that. The first would be that agriculture is directly exposed to the weather. So if rainfall is weaker or temperatures are higher, or if irrigation water for crop is less available, then crop yields will be directly impacted and can fall quite quickly. And then that will affect the supply, particularly for staples such as rice and wheat. And it'll also have impacts on rural incomes because they depend a lot on agriculture, especially in South Asia. And the second reason would be that food spending accounts for a large share of household spending in many APAC economies. And when prices or cost pressures for staple crops, they rise, the impact is felt by the households immediately.

That reduces the real income, especially for the lower to middle income households, because then they will have less money left for other discretionary spending other than food. Food prices also increase headline inflation, and then they also create second-round impacts. The transmission channel here would be that if households now expect food prices to keep rising, then their wage demands may also increase. Or if the businesses face higher input costs, they may pass those costs at least partially on to the end consumers, which again will raise burden on the households and may also increase the demand for wage increases as well. And that will make inflationary expectations more persistent. And this is what we in technical terms call a wage-price spiral. So the risk for that is also more severe now within the El Niño situation.

And finally, food is also politically sensitive. So governments often respond quickly when, especially for crops that are staple food items. When the prices of those crops rise, the governments have to respond quickly. They may do so by releasing strategic reserves or increasing subsidies for farmers or restricting the exports of those crops, or even accelerating imports from other regional markets, or impose price controls to support the farmers and the domestic market. But then those actions can stabilize the domestic prices, but then they can also disrupt regional and even global trade flows because many of the APAC economies are also exporters of such crops. So then this food shock doesn't just remain an agriculture issue. It quickly becomes an inflation challenge, a fiscal buffer challenge for the government, a trade-side challenge, both regionally and globally. And in some countries, especially I would highlight South Asian and Southeast Asian economies, it can also become a potential social stability challenge. In terms of vulnerability or exposure, I would say the most exposed economies are agriculture-heavy or food price-sensitive markets such as India, Pakistan, Indonesia, Vietnam, and Thailand, because in all these economies, the share of agriculture is high in both GDP terms, like as a share of GDP, and also in terms of how much employment it produces for their domestic economies. And then they're also major staple crop exporting markets. So those 3 elements combined then make them more exposed to the El Niño shock.

 

Kristen Hallam:

Thanks for walking us through that, Ahmad. So looking ahead, what indicators should businesses be watching to judge whether the outlook is stabilizing or deteriorating?

 

Ahmad Mobeen:

I would focus mainly on around four indicators. So first would be, of course, energy and freight costs. So if oil prices, LNG prices, shipping rates, insurance costs, they all stabilize, that would reduce pressure on inflation and also on business margins. But if they stay elevated for longer or even rise further, then that would signal a broader and here-for-longer cost shock or supply-side shock. Second indicator would be export orders. So for APAC in particular, new export orders, electronic shipments, semiconductor productions, they're especially important because they then tell us whether the AI technology cycle, upcycle, is still providing support and to what scale, and whether the momentum is likely to remain strong or moderate a little. And for this, I would particularly bring the listener's attention to our S&P Global Market Intelligence Purchasing Managers' Indices, PMI, service, which contains high-frequency data on export orders, also delivery times, input costs, and also output price pass-through for all regional and global markets. Those PMI surveys right now, if you look at the high-frequency indicators, they're also showing the trends that I mentioned earlier about prices versus volume divergence, and also the seeping cost pressures in the business input costs, and then onward transmission into elevated prices for end consumers.

And the third watchpoint, I would say, would be currencies and capital flows. If regional currencies, they stabilize against the US dollar, central banks will naturally have more room for flexibility. But if those depreciation pressures, they persist or they intensify, then the policy may need to stay tighter for longer. And lastly, I would say we need to keep an eye on food prices and weather indicators in general, because it is worth keeping an eye especially on rainfall and reservoir levels, and also any initial crop estimate data coming out from the government agencies, especially for staple prices like for rice and wheat. So those are key signals for inflation and also consumption trends, and also if need arises for that policy intervention in terms of subsidies or export controls, et cetera. So the stabilizing scenario would be that if energy prices increase, AI-related demand would remain strong, currencies stabilize, and food prices stop rising. That will be the case for stabilization.

But on the other hand, if the situation persists like it has persisted, then the deteriorating scenario would be more likely, where the oil and freight costs will stay elevated for longer. Technology demand may moderate going forward, especially from the second half of 2027. El Niño, its impact seeps through further and worsens the agriculture output. And then the central banks are also forced into a more tightening or higher-for-longer scenario, despite weakening economic growth prospects in the region.

 

Kristen Hallam:

All right. This has been a great conversation on APAC economies, Ahmad. It is time for us to wrap up. However, what key takeaway would you like to leave our listeners with?

 

Ahmad Mobeen:

Thank you, Kristen. It has indeed been an interesting discussion. I would say that the key takeaway is that APAC growth right now, it remains resilient, but this resilience then is becoming more uneven the longer these compounding shocks are persisting. So the AI-led technology upcycle, electronics exports, and domestic demand in some major economies, they're still supporting growth. But at the same time, higher energy costs, tighter financial conditions, currency pressures, and worsening El Niño, all together as compounding shocks, they're making the outlook more lopsided. So it goes without saying that APAC may not be treated as one singular narrative. So, you know, tech-linked economies, they are benefiting from AI demand, but now face moderation risks. Big markets like India, Indonesia, they are relying more on domestic demand, but face their own challenges now linked with especially inflationary pressures, capital outflows, and the agriculture-heavy economies of the region, they are now facing greater food price pressures, employment pressures, food security pressures, and also potential political risks owing to the worsening El Niño. So uncertainty overall, it is still clouding the outlook and volatility and those trade-off risks, they are therefore rising.

 

Kristen Hallam:

Thank you again, Ahmad, for taking the time to help us make sense of the forces shaping Asia-Pacific's economic outlook. And thanks to our listeners for joining us. Until next week. Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.