Asia's Policy Buffers Thinning as Shocks Persist, IMF Official Says

By Fabiana Negrin Ochoa

Asian economies have weathered the fallout from the Iran war reasonably well, thanks to a huge offset from the artificial-intelligence boom.

But there are limits to how much they can adapt, says a top official at the International Monetary Fund.

After a series of crises, from Covid to military conflicts, policy buffers are wearing thin, said Krishna Srinivasan, head of the IMF's Asia-Pacific department.

Without those buffers, governments could be ill-prepared to address future crises and deal with the squeeze from higher rates.

Asia's resilience in the face of the energy shock caused by the Middle East war has so far exceeded expectations, and a tentative ceasefire had spurred hopes of a resolution that would limit the economic damage.

Now, renewed escalation has pushed oil back above $100 barrel and driven bond yields to multiyear highs as markets brace for an inflationary hit that will necessitate further interest-rate increases.

Those developments bring some of the IMF's darker forecasts back into focus.

In its World Economic Outlook in April, the fund laid out growth scenarios based on the duration and severity of the energy disruption.

That the more adverse outcomes forecast haven't materialized is largely due to two tailwinds: the technology boom and trade that has withstood U.S. tariffs, Srinivasan said.

Artificial intelligence-driven demand for Asian exports has been a saving grace for economies such as South Korea, which make the chips and components powering AI. That has spilled over across the region, with trade data showing AI-related boosts throughout supply chains.

"But going forward, things could change. Things could get worse," Srinivasan said.

In the context of a severe scenario in which oil prices remain higher and for longer, Asia's growth could be two percentage points lower, the IMF estimated in April. In the most dire case, the global economy could tilt toward recession.

It's hard to say where the point of inflection would be, Srinivasan said. "But the fact is, the longer this war lasts, the sooner your buffers are going to [run out]."

A lengthier conflict will be costlier for countries not only in terms of growth, but also because they might lack the capacity to provide subsidies or tax cuts on gas, petroleum and other products, he added.

If governments don't have the policy space to protect against a cost-of-living crunch, domestic demand could suffer.

Asia looks particularly vulnerable on that front: "Whether it's investment or consumption, the domestic demand recovery has been weak in Asia since the pandemic," Srinivasan said, calling for a shift away from an overreliance on externally driven growth.

A higher-rate environment also puts the onus on authorities to remain fiscally disciplined, even as tighter financial conditions threaten to weigh on domestic demand, he added.

"Debt can come back to haunt you more now," he said. "That's why it's important to have your fiscal house in order, have good debt-management practices, and establish a medium-term fiscal framework that provides an anchor and confidence to markets."

As long as the technology boom persists and exports remain resilient, Asia could continue to outperform expectations, but uncertainty remains high.

AI has been a positive surprise, but headwinds abound. Srinivasan cited El Nino as the potential next major disruption to economies, potentially causing another inflation shock.

"So even though I would say risks are more balanced than in April, they're still tilted to the downside."

Write to Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com

(END) Dow Jones Newswires

September 17, 2026 00:16 ET (04:16 GMT)