JAKARTA – The effects of the Iranian war have started to impact the Asia-Pacific. This region is now facing a double blow: oil prices have risen, and currencies continue to weaken. For many governments in Asia, the situation is complicated. Political options are limited, but pressure is mounting.
The Straits Times reported on Monday, March 30th that Asia buys around 80% of the oil that passes through the Strait of Hormuz. According to J.P. Morgan product analysts, the region is facing a potential shortage that could worsen in April and May. This means that authorities in many countries must act quickly.
The pressure is being felt on the ground. In Manila, jeep drivers are facing a tripled diesel price. In Vietnam, the threat of a jet fuel shortage is starting to loom. In South Korea, major cosmetic companies are scrambling to find plastic resins for packaging their skincare products.
Like other regions, Asia is also facing the threat of rising inflation and disrupted growth. However, the impact in Asia is more acute because the region’s dependence on imported energy is very high.
The Straits Times stated that Asian currencies, which were already fragile, have now plunged even lower. In March, the Indian rupee, the Indonesian rupiah, and the Philippine peso hit record lows against the dollar. The Japanese yen and the South Korean won also reached low points.
“The main problem is that Asian currencies have been too weak since the beginning,” said Alicia Garcia Herrero, Natixis’ chief economist for Asia-Pacific in Hong Kong, to The Strait Times. According to Alicia, central banks also have little room as inflation pressure makes rate cuts more difficult.
The US dollar, which has become a safe asset again, has surged in Asia. The increase has been more than 4% against the won, peso, and Thai baht, well above the reform compared to the euro.
The problem is, there’s no easy way out. Raising interest rates risks slowing down the economy while support is necessary. Fuel subsidies are expensive and can strain the budget. Interventions in the foreign exchange market are also risky and deplete currency reserves.
“I think the essential point is that there is no easy policy at this stage,” said Sonal Varma, Nomura’s chief economist for Asia ex-Japan.
The Straits Times reported that Australia has raised rates since the start of the war in late February. South Korea is using its national pension funds to help protect the won. India and Indonesia are also defending their currencies while adjusting market mechanisms. Japan has signaled intervention again, while the Philippines has declared a state of emergency and held a sudden monetary policy meeting.
HSBC’s Asian economist, Fred Neumann, told The Straits Times that there is no clear plan to deal with such a crisis. According to Neumann, Asian countries can fundamentally only slow down the pace of decline, not completely change the market direction.
