This article first appeared in The Edge Malaysia Weekly on June 23, 2025 - June 29, 2025

THE escalating war between Israel and Iran is expected to impact Malaysian trade growth in the coming months, as risks are increasing for vessels crossing the narrow Strait of Hormuz and its surrounding waters.

While Iran has yet to close the channel, the prospect of the Islamic republic doing so is rising, especially if the US steps into the conflict with direct military support. It is worth noting that Iran has never closed the channel that it shares with Oman.

Nevertheless, military action by Israel and its biggest ally, the US, on Iran could eventually make the strait too dangerous for commercial and private vessels to use, closing the only maritime route to the oil-rich Gulf region and cutting off the port of Jebel Ali in Dubai.

“Rising tensions between Israel and Iran have sharply elevated the geopolitical risk premium across global markets,” says Imran Nurginias Ibrahim, chief economist at BIMB Securities. “The threat of escalation, especially involving regional powers or critical infrastructure such as the Strait of Hormuz, raises the risk of a significant supply shock in global energy markets.”

According to data by the US Energy Information Administration (EIA), 20.9 million barrels of crude oil and petroleum liquids were transported through the Strait of Hormuz every day in 2023, making up about 27% of the total maritime oil trade.

Any disruption to this vital corridor would not only tighten global oil supply, exposing the limited spare capacity among other oil producers, but could also trigger sustained price surges and broader inflationary pressures, says Imran.

Beyond energy markets, the broader trade and economic implications are equally concerning.

Geopolitical instability often reverberates through global supply chains, driving up shipping costs, insurance premiums and delivery times. This is particularly critical for Asia’s export-driven economies, including Malaysia, says Imran.

“Even limited disruptions here [at the Strait of Hormuz] could have disproportionate effects on energy markets and global trade flows,” says Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia Bhd in a June 4 report.

In recent years, attacks by the Houthi militant group on commercial vessels in the Red Sea at Bab El Mandeb — a strait between Yemen on the Arabian Peninsula and Djibouti and Eritrea on the Horn of Africa — in retaliation against Israel’s military campaign in Gaza have led to vessels avoiding the narrow waterway.

The attacks have been labelled the Red Sea Crisis and triggered a global response, with the US, UK, European Union and others launching naval operations to protect maritime traffic in the area.

Asia-Europe vessels avoiding the strait would take a much longer journey around Africa’s Cape of Good Hope to reach Europe and beyond, rather than the Suez Canal, adding days to their journey and increasing costs.

According to the EIA, a typical voyage from the Persian Gulf to the Amsterdam-Rotterdam-Antwerp (ARA) petroleum trading hub via the Suez Canal takes 19 days. If a ship takes the Cape of Good Hope route, it takes nearly 35 days to reach the ARA.

Longer routes put upward pressure on freight rates because of higher fuel costs and fewer available ships. A Very Large Gas Carrier, for example, consumes about US$30,000 (RM127,810) to US$35,000 worth of fuel per day, using high-sulfur bunker fuel at 2023’s average prices, according to the EIA.

In addition to higher fuel costs, a longer voyage requires more ships to maintain the same delivery schedule, and fewer available ships contribute to higher tanker rates and costs.

Already, the Baltic Exchange Dry Index had risen by 173% between Jan 30 and June 17. The index — essentially a benchmark for the price of moving commodities such as coal, iron ore and grains — tracks the composite shipping freight cost of the Capesize, Panamax and Supramax time charter averages.

Notably, the index surged to 3,346 points on Dec 4, 2023, from 1,385 points on Nov 2, 2023.

As at June 17, the conflict has yet to have a significant impact on freight markets, says Freightos, a company that operates a booking and payments platform for international freight.

Although the closing of the Strait of Hormuz is a major concern, Freightos believes that Iran may hesitate to do so, as its oil exports are dependent on the strait. Furthermore, such a move is unlikely to impact fuel prices as there is sufficient supply at the moment.

Meanwhile, only between 2% and 3% of global container volumes transit the Strait of Hormuz, Freightos says in a June 17 note. Disruptions to the container market would be felt primarily in the Middle East, if Iran decides to close the strait, it says.

“But closure of the strait would cut off access to Dubai’s Port of Jebel Ali, a major transshipment hub between the Far East and points to the west. Transship volumes would need to be shifted elsewhere, possibly to South Asian hubs, which could cause congestion and higher freight rates,” says Freightos.

Similar incidents in recent years have amounted to a limited exchange, states George Brown, senior economist at Schroders, a UK-based asset management company.

“Iran’s response has typically been sufficient to demonstrate domestic strength without escalating tensions further. So far, this conflict has proved more brutal than other recent escalations.

“Even so, it remains a direct exchange of fire between Iran and Israel with minimal disruption to the oil market,” says Brown in a June 17 report.

He believes the likelihood of Iran taking any action in the Strait of Hormuz, the often-touted disaster scenario for oil markets, appears remote, as such action would impact flows for the other Middle East nations, which are aiming to mediate the situation, while inflicting little harm on Israel.

“The US and several Middle Eastern nations (including those which have already condemned the attacks, such as the UAE and Saudi Arabia) have no interest in a flare-up of tensions in the region.

“Nor do they wish for disruption to global oil markets. Previously, they have intervened to calm situations like this,” writes Brown.

Malaysia’s open economy is subject to the vagaries of global geopolitical and economic developments.

“A broader Middle East conflict that spills over into key shipping lanes could severely hamper global trade flows. For Malaysia, a trade-dependent economy highly integrated into global manufacturing networks, such disruptions would be particularly detrimental,” says Imran.

Higher shipping costs and delays could erode export competitiveness, while weakening global demand amid geopolitical uncertainty could weigh on Malaysia’s key exports, particularly electronics and commodities, he says.

Additionally, protracted instability may heighten financial market volatility, affecting investor sentiment and capital flows into emerging markets.

“In short, while the direct military confrontation may be geographically distant and contained for now, the economic and trade spillovers could quickly become global, reinforcing the fragility of interconnected supply chains and the importance of geopolitical stability for sustained economic recovery,” says Imran.

Nevertheless, Malaysia’s direct trade exposure to the Middle East remains small, according to a June 18 report by CIMB Securities. “Just 2.2% of Malaysia’s total trade is with Middle Eastern economies, while trade with Iran accounts for a mere 0.09% — a negligible share.”

The research house adds that Malaysia may benefit from improved terms of trade if oil and liquefied natural gas prices remain elevated, given its role as a net exporter of these commodities.

“Export earnings could rise, supporting the trade surplus and, by extension, the current account balance. However, this benefit may be partially offset by higher costs for imported refined petroleum products, including diesel and gasoline, which Malaysia continues to import to meet domestic needs.”

While the risk to global trade is there, economists do not believe that the immediate impact would be severe. The risk of Iran closing down the Strait of Hormuz is low, as the country does not have the capability to control a major global choke point.

A blockade would also hurt Iran’s own interest, as it also relies on it for its oil exports, says CIMB Securities.

“Any disruption would hurt its own economy — and harm key customers like China — more than it would help. While Iran has repeatedly used the threat of closing the Strait of Hormuz as a geopolitical bargaining chip, the credibility of such threats remains low.”

Nevertheless, if the closure materialises, it will weigh on Malaysia’s gross domestic product growth, says CIMB Securities.

For starters, closure of the Strait of Hormuz would result in higher crude oil prices. This would have a mixed impact on Malaysia’s fiscal situation.

On the one hand, higher crude oil prices, particularly above US$80 per barrel, would boost government revenue through increased Petroleum Income Tax. It is estimated that for every US$1 per barrel increase in oil prices, government revenue would increase around RM250 million to RM300 million.

On the other hand, Malaysia’s blanket RON95 fuel subsidy bill would come under pressure, rising more than RM400 million for every US$1 per barrel increase in oil prices, according to CIMB Securities. “If price surges are short-lived — as past episodes indicate — the net fiscal impact may remain contained.”

If crude oil prices remain elevated for an extended period, Malaysia’s subsidy bill could widen, straining the fiscal deficit and potentially crowding out other priority expenditure such as development spending and social programmes.

The federal government has allocated RM52.6 billion for subsidies and assistance in 2025, on the assumption of crude oil price of US$80 per barrel.

While it seems that the US is inching closer to deciding on a direct military engagement against Iran, as at June 19, Washington has yet to commit to anything that could escalate the conflict.

However, risks to global trade and economic growth remain persistent, as long as no solution is achieved between the warring parties. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.