Energy crisis raises sovereign credit-rating downgrade risk for several Southeast Asian nations

Analysts say several Southeast Asian countries face an elevated risk of sovereign credit-rating downgrades as fuel-subsidy programs add to fiscal burdens. While the measures are intended to reduce social unrest amid surging fuel prices, they can also weigh on local currencies, push inflation higher, and increase pressure on public debt.

Fuel subsidies strain budgets as oil prices rise

Many Southeast Asian economies rely heavily on imported oil from the Middle East. The rise in fuel prices following the Iran conflict has quickly increased regional fuel costs, a challenge compounded by relatively underdeveloped public transport infrastructure. To ease social pressures, governments have expanded subsidies for households and transport businesses.

• Philippines: The government provides 5,000 pesos (about 83 USD) to taxi and jeepney drivers.
• Indonesia: Subsidies are used to keep gasoline prices at around 10,000 rupiah per liter (about 0.59 USD).
• Thailand: Diesel-subsidy costs rose sharply, pushing the deficit of the fuel-price stabilization fund to 42 billion baht (about 1.29 billion USD) by the end of March.

Thailand and Indonesia: deficits and debt concerns

In Thailand, the fuel-price stabilization fund is considering borrowing up to an additional 20 billion baht to cover the shortfall, a move that could increase public debt. Thailand’s public debt is currently around 66% of GDP, approaching a 70% ceiling.

In Indonesia, Coordinating Minister Airlangga Hartarto said last month that if oil prices rise to 97 USD per barrel, the budget deficit could reach 3.5% of GDP, above the 3% ceiling. The government previously projected this year’s deficit at 2.7% of GDP. Oil prices have since risen to around 110 USD per barrel.

Spending plans raise worries about fiscal discipline

Indonesia’s administration under President Prabowo Subianto is rolling out large-scale spending programs, including a plan to provide free meals in schools for 80 million students. Rating agencies Moody’s and Fitch have downgraded Indonesia’s outlook from “stable” to “negative” in February and early March, respectively.

Analysts warn that continued fiscal spending growth tied to fuel subsidies could increase Indonesia’s risk of a sovereign downgrade. The government has begun considering cutting the budget by more than 100 trillion rupiah, including reducing the school meals program to five days a week to curb deficits.

Currency weakness and higher import costs

Another concern for the region is depreciation pressure on local currencies as investors worry that higher public spending could weaken fiscal conditions. On March 31, the Philippine peso closed at 60.748 per USD, marking a third consecutive session at a record low. The Indonesian rupiah trades around 17,000 per USD, close to historic lows.

Bond-market signals have also turned less favorable: Indonesia’s 10-year government bond yield rose to about 6.9% in mid-March, the highest since April 2025.

Analysts note that when currencies weaken, import costs rise, pushing domestic prices higher. In that sense, fuel-subsidy measures aimed at easing near-term social pressures could contribute to higher inflation over time.

Regional lessons from the 1997 crisis

Analysts point to memories of the 1997 Asian financial crisis as a warning for the region. At the time, the collapse of the Thai baht triggered widespread financial volatility across Southeast Asia.

“Since then, countries in the region have strengthened their fiscal foundations and increased foreign-exchange reserves, improving resilience to shocks. However, the risk of short-term fiscal weakness remains,” said Harue Shimato, a senior researcher at the Global Strategy Institute of Mitsui & Co., in an interview with Nikkei Asia.