Dragoman Digest

ASEAN manufacturers reel from second-order effects of the Iran War

AI-driven export growth masks underlying economic troubles

Southeast Asian manufacturers are beginning to show strain as the consequences of the Strait of Hormuz’s closure begin to crystallise. Despite remaining in positive territory, sentiment among ASEAN’s manufacturers – as measured by the S&P Global Purchasing Managers’ Index (PMI) – reached a nine-month low in April. The picture would be much worse if it weren’t for robust demand for electronics used in data centres. Otherwise, manufacturers in traditional and typically labour-intensive sectors are feeling the pressure. Filipino manufacturers haemorrhaged some 217,000 jobs in March, nearly six percent of the sector’s workforce. The Philippines is more exposed than most given its lack of energy subsidies. In Indonesia, two thirds of the country’s manufacturing sectors reported growth well below Q1’s aggregate six percent figure.

Costs remain the defining pressure point, compounding pre-existing challenges including US tariff measures and slower growth throughout ASEAN. Vietnam, for example, has faced a combination of higher energy prices and 30 percent price hikes for oil-linked inputs. Elevated shipping costs are another major challenge, with freight premiums climbing by 15 percent. SMEs face acute burdens, lacking financial resources and often the ability to quickly pass on costs given fixed export contracts. With inventory cover for inputs expected to deplete within the next three months and the prospect of energy flows returning to pre-war levels appearing remote, ASEAN’s manufacturing and inflationary crisis will only intensify.

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India’s middle class faces AI threat

AI is threatening to compound India’s pre-existing job creation challenges

Since the early 1990s, India has successfully positioned itself as a cost-effective and scalable provider of IT and software services. India’s five software and IT services titans, Tata Consultancy Services (TCS), Infosys, HCL Technologies, Wipro and Tech Mahindra, have been a major export success story for India Inc. However, AI’s widespread adoption, which is increasingly automating coding and software services, is challenging these companies’ longstanding core business model. Early signs of distress are apparent. India’s largest provider, TCS, recently recorded a 2.4 percent revenue decline and shrank its workforce by 4 percent for the fiscal year ended in March. TCS’s figures coincide with forecasts from within the industry suggesting that 40 percent of existing services risk being disrupted by AI.

Although early job losses are modest, AI’s broader challenge to software-as-a-service based industries has caused widespread fear in India. Any material job losses would have significant adverse consequences for India’s economy. India’s IT sector is the country’s largest white-collar industry, employing over six million people. It also brings in annual revenues of US$300 billion, and is a major source of exports. India, despite its strong headline growth figures, has struggled to generate jobs for masses of underemployed graduates. Approximately 29 percent of Indian graduates are unemployed and the figure may well be higher.

Indian software giants are not sitting idle. Firms are increasingly restructuring their value offering towards helping clients deploy AI. Companies like TCS are also seeking to partner with AI companies, in this case OpenAI, to help upskill employees, build agentic solutions and jointly develop data centres. India is also launching global capability centres (GCCs), which offer a combination of services ranging from IT support to R&D. Although these measures will help mitigate the damage, further job losses appear inevitable.

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China’s RMB internationalisation push sees its moment

Payments to sanctioned oil producers have accelerated Beijing’s cross-border payment system – though talk of a “petroyuan” is likely premature

The Iran conflict has provided an opportunity for Beijing to promote the internationalisation of the RMB and its associated alternative payment infrastructure. US sanctions regimes have largely disconnected Iranian and Russian energy sales from the international dollar system. As such, even as the Trump Administration has selectively lifted sanctions on Russian oil, buyers such as India have been left with few options but to transact in RMB and use China’s interbank payment system. During the first month of the war in Iran, China’s cross-border interbank payment system (Cips), a rival to the Western SWIFT system, hit a record RMB 920.5 billion (US$135.7 billion). Though Cips – first introduced in 2015 – does not provide transaction breakdowns, the record increase coincided with Russia’s oil export revenues doubling to US$19 billion over the same period.

The marked increase in the use of Cips has prompted speculation that the greenback’s dominance over global oil trade will subside. Increases in RMB-based oil purchases, however, have come from a low base. Despite China’s status as the world’s largest importer of crude oil, the RMB’s share of the global oil trade has languished at between three and eight percent. The US dollar’s share has remained steady at 80 percent.

For the RMB to displace the dollar, Beijing would likely be required to undertake a much greater liberalisation of capital controls – which it appears reluctant to countenance. While China has incrementally opened up its onshore commodities futures markets, foreign interest has been minimal. The increased usage of Cips has nevertheless provided Beijing with a valuable proof of concept as it seeks to harden China’s ability to withstand any US sanctions.

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