Why Southeast Asia’s small firms could bear the brunt of the latest oil shock

Singapore pizza shop owner Roy Chan has ridden out more than one business shock – from the Covid-19 pandemic to US tariff pressures – but he now sees another looming threat. Suppliers for ingredients used at his Goldenroy Sourdough Pizza restaurant had warned prices could soon rise by up to 30 per cent following a surge in oil prices due to the escalating Iran war, Chan said. “Delivery providers have not increased prices yet, but it may come in the next few weeks or months,” he added. Like Chan, many Southeast Asian operators of small and medium-sized enterprises (SMEs) are bracing themselves for higher operating costs as fuel prices surge alongside the conflict raging across the Middle East. Southeast Asia trades less with the Gulf region than major economies such as China and the United States, but businesses are still exposed because higher oil prices quickly feed through into freight, logistics and travel costs. Observers say SMEs are likely to be hit hardest by the shock because they have less capital than their larger counterparts to absorb sudden increases in operating costs. “SMEs are typically more vulnerable because they have less pricing power to pass on cost increases, thinner cash buffers to absorb increases in freight and energy costs, and fewer alternative suppliers or routes than larger firms,” said Joan Collar, chief commercial officer at insurance brokerage and risk management firm Marsh Asia. Businesses in the region were likely to feel the volatility through higher fuel costs, disruptions and delays as insurers and logistics providers repriced risk, she added. Tan Swee Liang, an associate professor of economics at Singapore Management University, said regional firms could also experience spillover effects from economies with deeper exposure to the Middle East, such as India and China, including weaker demand and supply chain disruptions. Rising costs may also force some small firms to exit the market if they are unable to pass increases on to customers, according to Aimi Zulhazmi Abdul Rashid, an associate professor at the Universiti Kuala Lumpur Business School. “Competition will be even tougher, and some may need to review their positions if the current situation is still sustainable [and decide whether] to stay or leave,” he said. Collar said SMEs in energy-intensive and transport-reliant sectors – including logistics, manufacturing, construction, food and beverage and retail – could feel the impact of higher operating costs most quickly. Citing Thailand and the Philippines as examples, Tan said firms in economies that were net energy importers and had weaker currencies could bear the brunt of the fuel shock. Thailand has one of the region’s highest net oil import burdens relative to its gross domestic product, leaving it more exposed to oil price shocks, according to Tan, while the Philippines faces the risk of higher inflation because of its weaker peso and reliance on imported energy. Tan said some SMEs in Singapore were beginning to feel the heat and were postponing or scaling back expansion plans. She urged government support “beyond short-run relief” to help SMEs and industry associations improve competitiveness in the long term. Southeast Asian countries have rolled out measures to stem the rise in fuel costs in recent days, but analysts warn that they may merely provide short-term relief for firms. Crude prices soared back above US$100 per barrel on Thursday, with analysts warning that US$90 to US$100 could be the new normal for a while, Agence France-Presse reported. On Tuesday, Thailand said it would freeze diesel prices for 15 days and was prepared to cut excise taxes to prevent any knock-on impact on the prices of goods. Vietnam is considering a plan to temporarily remove taxes on fuel imports. A day earlier, Malaysia vowed to maintain the pump price of subsidised RON95 petrol at 1.99 ringgit (50 US cents) per litre despite rising global oil prices. However, Aimi said that cost pressures would be hard to suppress even with subsidies. “The direct impact would come from diesel, which is used for trucks and buses, and would lead to a domino effect on the supply chain,” he said. In Singapore, petrol prices sailed past S$4 (US$3) per litre for premium grades on Wednesday, pushing the price of a litre of 98-octane fuel to about S$3.80 at Esso, Shell and Caltex stations. Chan said he had yet to map out a contingency plan despite higher operating costs across the business landscape. “The full effects will likely be felt in the coming months, and we will decide accordingly … We’ll try our best to absorb the cost increase,” he said.

Why Southeast Asia’s small firms could bear the brunt of the latest oil shock

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Observers say SMEs are typically more vulnerable as they have less capital to absorb sudden increases in operating costs

Observers say SMEs are typically more vulnerable as they have less capital to absorb sudden increases in operating costs