Financial markets across the ASEAN+3 region—the Association of Southeast Asian Nations (ASEAN) plus China, Japan, and Korea—have shown notable resilience since the conflict in the Middle East broke out on 28 February 2026.

Despite heightened uncertainty and rising energy prices, market adjustments across the region have remained largely orderly. This is consistent with the typical dynamics of a supply-side energy shock. Economies that rely more heavily on imported energy have come under greater pressure, particularly through weaker exchange rates as higher fuel costs—largely priced in US dollars—push up import bills.

Crucially, ASEAN+3 entered this period of volatility from a position of relative strength. Robust bank capital buffers and generally adequate external reserves have helped regional markets absorb the initial shock without systemic disruption.

Admittedly, the impact has been more persistent than some other regions. But the story is not one of systemic stress, and market performance has varied significantly across ASEAN+3 economies depending on their energy dependence and economic fundamentals.

A differentiated market performance

The recent performance of regional financial markets highlights an important point: this has not been a broad-based regional retreat. Instead, market pressures have been selective, reflecting differences in energy dependence, fiscal conditions, and sovereign credit strength.

At the peak of market adjustment, ASEAN+3 economies generally performed better than many global peers.

Equity markets across the region adjusted downward significantly but trading activities remained orderly. On average, regional equity indices recorded a peak decline of about 9 percent, compared with 11 percent in the euro area and 13 percent for the MSCI Emerging Markets index. While most markets in the region have shown signs of stabilizing, several have yet to fully recover to pre-conflict levels.

Foreign exchange markets saw depreciation pressures but functioned normally. Regional currencies weakened against the US dollar, although the average depreciation of roughly 2.7 percent remained smaller than the 3.6 percent decline seen across emerging markets more broadly. Pressure was most evident in economies where trade deficits or domestic inflation are sensitive to energy price fluctuations.

Government bonds have also remained comparatively stable. ASEAN+3 government bond yields recorded smaller increases than global peer groups. Average 10-year government bond yields rose by approximately 36 basis points, compared with 46 basis points in the euro area and 68 basis points across emerging markets. This likely reflects expectations that governments will act to cushion the impact of higher energy prices, while central banks remain attentive to inflation risks.

Capital flows have likewise remained differentiated rather than indiscriminate. Selling pressure from foreign investors in both equity and bond markets was seen in many economies, but the size of outflows varied, suggesting that investors continue to distinguish between economies based on sovereign risk and energy exposures.

Risks to financial stability could rise if the conflict persists

Although the initial adjustment has been moderate, a prolonged conflict in the Middle East could still pose significant risks to financial stability across the region.

Fiscal pressures and capital flow volatility could become more pronounced. Public debt remains elevated in several regional economies, limiting the room for governments to cushion households and business from higher energy costs. A prolonged period of subsidies or fiscal support could widen deficits and test investor confidence. Economies with larger foreign holdings of government debt may also be more vulnerable to sudden shifts in global risk sentiment.

External financing and liquidity pressures could also intensify. While foreign exchange reserves are broadly adequate across the region, reserve buffers have become thinner in some economies. Persistently high import costs and currency depreciation could increase external financing pressures over time.

Banking-sector vulnerabilities remain contained but warrant monitoring. Banks across the region generally maintain capital adequacy ratios well above regulatory requirements, providing a meaningful buffer against external shocks. However, relatively high non-performing loan ratios in some economies point to pockets of underlying fragility. A prolonged economic slowdown combined with higher borrowing costs could place additional pressure on bank balance sheets.

Households and SMEs may also face growing financial strain. High or fast-rising household debt-to-GDP ratios in some economies leave families more exposed to higher living costs. Small and medium-sized enterprises (SMEs), meanwhile, are seeing profitability margins squeezed by rising fuel and financing costs. If business conditions deteriorate further, this could translate into higher loan defaults and broader stress in the banking system.

Preserving the region’s buffers

The relatively orderly market performance seen so far reflects stronger policy frameworks and the position of strength from which ASEAN+3 entered this shock. However, the continued geopolitical uncertainty highlights the need for proactive risk management.

If geopolitical tensions persist, policymakers will need to remain focused on preserving policy space and responding to risks in a targeted manner. Preventing stagflation and systemic financial stress will require close monitoring of how the shock spreads through financial markets, public finances, and the real economy.

Over the medium term, rebuilding and preserving fiscal, external, and financial buffers should remain a priority. Strengthening crisis preparedness and response capabilities will also be essential to ensure ASEAN+3 remains a bastion of financial stability, even as global energy markets remain volatile.

Looking further ahead, this episode underscores that the green transition, energy security, and stronger regional energy connectivity are no longer matters of climate ambition alone. They are increasingly central to the region’s macroeconomic and financial resilience in a more uncertain global environment.