A perfect storm gathers over South Asia

Energy shocks, El Niño, and an AI-triggered job crisis threaten to test the region’s economic resilience

South Asian currencies and financial markets are flashing amber to red. The Indian, Sri Lankan and Nepali Rupees are among the worst-performing currencies in Asia, down 7% since January 2026. Currency market weakness is reinforced by falling equity and bond prices, all of which portend dark clouds gathering over the South Asian economic horizon. This commentary is not an attempt at forecasting but a reminder of what could go wrong. Extreme events do not mean extreme outcomes in markets; they only increase the likelihood of such outcomes.

An energy crisis with damage to GCC infrastructure: The latest spike in energy prices following the US/Israel-Iran war that started on February 28 has lifted Brent crude prices nearly 38% to $95 per barrel. While the current hike in oil prices may not last as long as the 1973-1981 or 2004-2014 episodes, and prices may start to normalise in a year or two, the fallout on South Asian countries could be more severe.

The Gulf's energy infrastructure and its brand have to be repaired: The rise in imported fuel and fertiliser prices is already fueling higher inflation across energy-import-dependent South Asia. Fuel, fertiliser, and food subsidies undermine fiscal balances, without the booming global demand of the earlier episodes to offset the negatives. Moreover, unlike previous episodes when oil price hikes were managed, this time, damage to production capacity constrains how much the GCC economies will be enriched.

The International Energy Agency (IEA) estimates that the damage to over 80 energy facilities in the Gulf states may cost $58 billion and take several years to repair. As of April, the International Monetary Fund (IMF) has sharply slashed growth projections: Qatar -8.6%, Kuwait -0.6%, Bahrain -0.5%, Oman 3.5%, UAE 3.1%, and Saudi Arabia 3.1%. While Saudi Arabia and the United Arab Emirates can re-route significant exports bypassing the Strait of Hormuz, Kuwait, Bahrain, and Qatar have no alternatives. Even for the others, reconstruction will likely stretch out for years, with QatarEnergy’s damaged facilities at Ras Laffan expected to take up to five years.

Apart from the damage to hardware, the Gulf Cooperation Council (GCC) countries now face the issue of regional security and stability. Financial centres such as Dubai will have to work hard to persuade professionals and businesses that it is safe to return. All considered, it is unlikely that economic momentum will return soon, with repercussions for energy prices and supply, and remittance flows to South Asia for some years.

The Super El Niño builds up: Meteorologists increasingly warn of a Super  El Niño event occurring in 2026 and early 2027. The event is called when the average sea surface temperatures rise 2 degrees Celsius above normal. Such events have only occurred four times since 1950. The temperature readings over the central Pacific suggest the  El Niño currently developing could surpass records set in 1877 and 2015.

The  El Niño effect disturbs monsoons across South Asia and significantly raises temperatures. These developments will hurt agricultural production, erode rural incomes, and threaten droughts. The damage to rural consumption spending can last for several years, depending on its severity and spread.

AI and job insecurity: While rural incomes are at risk from the Super  El Niño, urban white-collar workers face a growing threat of displacement by AI-augmented labour. The World Bank reports that jobs requiring AI skills command a 30% premium, while job listings for the most exposed white-collar jobs fell by 20%. The WB report also notes that South Asia scores below the emerging market average on AI readiness across all five key dimensions: government readiness, digital infrastructure, human capital, technological innovation, and legal framework. India is the notable exception, but it is also the most exposed due to the large number of people employed in legacy technology outsourcing jobs.

Regardless of the actual number of jobs lost, job insecurity is already widespread. As a result, consumer confidence and spending are likely to weaken, compounding the expected softness in rural demand over the next few years.

Staving off stagflation: All the factors will work to dampen growth across South Asia to different degrees. The smaller economies – Nepal, Sri Lanka, and Maldives – are likely to suffer the most due to the fewer options available, but Pakistan, Bangladesh and India will slow down. Meanwhile, imported inflation from crude price hikes and depreciating currencies will stoke inflation and make for stagflationary conditions. Fiscal and monetary policy will be fully stretched to manage price stability and revive growth while also steadying currencies.

Apart from the above, the risk of the AI tech bubble bursting globally over the next few years hangs over all countries as a handful of companies try to justify the stratospheric valuations. More specifically for South Asia, air travel disruptions and uncertainty related to the war in West Asia also dampen tourism flows, adding to the woes of Maldives, Sri Lanka, and Nepal, disproportionately.

If the above sounds like a litany of everything that could go wrong, you are right: it is. The objective here is to be prepared as institutions and as individuals, to safeguard our professional and personal lives. We need to be ready to survive the worst of the energy, fertiliser, food, supply chain, and jobs crisis, so we live to fight another day.

The writer is a financial economist and angel investor

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)