Asian businesses face balancing act as Mideast concern mounts

Fears of further regional conflict in wake of attack by Iran on Israel and its impact on oil prices haunt struggling small and medium-sized firms

Iran’s attack on Israel last Saturday has seen oil prices put markets on edge, a development that bodes ill for Asian businesses that depend on energy supplies and fuel-based raw materials.

Oil prices see-sawed as 10-month-high US crude oil stockpiles partly offset the impact of renewed Middle East tensions, but prices remained close to the year’s high of US$87 per barrel, amid worries of retaliation by Israel.

The United States also decided to reinstate oil sanctions on key oil producer Venezuela, in response to President Nicolas Maduro’s failure to meet his election commitments, adding to the volatility.

But the biggest worry is that the Iran-Israel tensions could spill to the Strait of Hormuz – a vital oil corridor for Asia.

This comes as prices of industrial minerals such as copper and zinc experience multi-month highs, while searing weather threatens food output. For most of Asia, it means the prospect of inflation is a real worry.

Will another year of volatility sound the death knell for Asian small and medium-sized businesses that are already stretched to their limits?

The answer will probably depend on their respective governments’ response to ensuring their survival and how these firms navigate geopolitical tensions.

Asia is expected to remain the sweet spot for growth in coming years, but a January survey by global accounting firm PwC showed that nearly two-thirds of Asia-Pacific CEOs were not confident of their long-term survival despite a rejigging of business models.

Big companies will be in a better position to dig their heels in because of stronger access to long-term capital, but small and medium-sized firms are likely to find it tough to secure more credit, especially during times of volatility. Many small and medium-sized businesses have pinned their hopes on central banks easing interest rates this year. This comes in the wake of them following a rate-rising cycle by the US Federal Reserve that began two years ago.

Yet there are doubts whether Asian countries will follow through with interest rate cuts should inflation nudge up.

“Central banks often don’t pay attention to the source of inflation. Why should they keep rates high if it’s a supply-side problem?” asked Biswajit Dhar, vice-president at the India-based Council for Social Development.

Higher interest rates were only going to push up costs that added to more inflation, Dhar said. Many governments were debt-stressed, but if geopolitical tensions worsened, authorities would have to loosen their purse strings to ensure the viability of smaller firms, he added.

Chances are high that current geopolitical tensions will continue, despite hopes that US and European Union pressure will keep Israel from attacking Iran.

However, the current environment means companies will need to be prudent.

Many small and medium-sized businesses that experienced bumper sales during the years of the Covid-19 pandemic will probably have to prepare for slimmer margins to tide them through this period of volatility.

If market conditions permit, they may even tap equity markets to raise funds by offloading a portion of their shares.

Cedomir Nestrovic, a professor of geopolitics and Islamic business at France-based ESSEC Business School, believes the chances of the Israel-Iran conflict escalating further are low because the stakes are too high for both sides and the rest of the world.

Beyond Middle East tensions and the Ukraine war, businesses will also have to manage policy uncertainty, with elections coming up in leading economies. The possibility of former US president Donald Trump returning to power may further aggravate US-China ties.

Asian businesses, which typically depend on both China and the US, will have to play a delicate balancing act in protecting their operations. They will also have to be wise in adopting a similar approach to disparate political parties in major markets such as India, where a high-stakes parliamentary election begins today.

Beyond Middle East tensions and the Ukraine war, businesses will also have to manage policy uncertainty