The war in Iran forces Asian economies to deal with a sagging currency and a surge in oil prices

The Asia-Pacific region is facing its toughest test yet since the COVID-19 Pandemic. There are few options available to policymakers as they try to protect their economies from an energy shock which is hitting them harder and earlier than anywhere else.

Asia purchases about 80% of oil shipped through the Strait of Hormuz. According to commodity analysts at J.P. Morgan, shortages are expected to worsen in April and May, meaning that authorities will have to act quickly.

Diesel prices have tripled in Manila for 'drivers' of jeepneys, colourful minibuses with a lot more power. Vietnam is facing a jet-fuel shortage, and South Korea's leading cosmetics companies are looking for plastic resin in order to manufacture the pots which hold their skincare products.

The U.S. and Israel war against Iran in Asia will likely lead to higher inflation and a slower growth rate, just as it has in other parts of the world.

Asian currencies, some of which were already in trouble, have been heavily sold. This has made them the biggest losers worldwide. The Asian financial crisis is resurfacing and policymakers are faced with a difficult choice: raise rates, spend reserves or watch their currencies fall further.

This month, the rupee of India, the rupiah of Indonesia, and the peso de Philippines have all reached record lows in relation to the dollar. The yen, too, has also hit a new low.

"The main problem is that Asian currencies were too strong before," said Alicia Garcia Herrero Asia-Pacific Chief?economist of Natixis, Hong Kong.

She said, "The central bankers... do not have any instrument."

"The economy is going to crash and they can't cut any more, not just because of inflationary pressure but also because they have already cut so many times."

The dollar has been one of the few safe havens for the past month, and it's reached historic highs. It is up more than 4% versus the won, the peso, and the Thai baht, compared to a gain of only 1.5% against the euro.

No Easy Options

The problem is that there is no easy solution, not least because the options other than importing more oil do not actually solve the squeeze. This is already affecting prices of plastics and fertilizers.

In response to higher rates, you risk slowing down an economy at a time when it is most in need of support. Subsidizing fuel is expensive, and bond investors may not like such a move in countries or emerging markets with budget pressures. Direct currency interventions can be risky and costly in volatile foreign exchange markets.

Sonal Varma is Nomura's Asia Outside Japan chief economist.

Varma stated that "whether it is the role of currency (or) monetary policy, fiscal policy," Varma. There will be macro variables which will have an impact.

"Each country must decide what the best trade-off is for their own local situation."

Australia has increased interest rates so far since the war started in late February. Authorities in other parts of Asia-Pacific rely on currency intervention, guidance and unconventional tools to help cushion rising petrol prices and stabilize financial markets.

Last week, it was reported that South Korea has turned to its huge national pension fund to increase its hedging and protect the won. India and Indonesia are defending their currencies, and changing the way their markets work. India has capped banks' currency positions while Indonesia opened a repo marketplace for short-term dollar.

Japan has renewed its intervention threats. The yen is not far from a four-decade low. Meanwhile, the Philippines declared a state emergency and let their currency fall to a new record low. They also held a surprise policy meeting last week, warning that they were ready to act.

Fred Neumann is the chief Asia economist for HSBC Hong Kong.

"I believe there is a growing recognition in Asia that you cannot really change the fundamental course of exchange rates. You can only lean against the wind.

Most of Asia has healthy foreign exchange reserves. There are no parallels to the dollar debts and pegged currencies that drove capital out nearly 30 years ago.

According to the most recent data available, India had approximately $698 billion of reserves on March 20. This would cover more than 11 months of imports. Indonesia and the Philippines have each more than six months worth of foreign currency import cover.

Analysts say that central bankers must be creative to counter the strong dollar demand due to the haven effect.

Neumann, from HSBC, said that policymakers need to be more agile. "Having unscheduled meeting and having frequent communication with market is likely helpful."

In an environment such as this, you don't want be dogmatic. You must be very clear. "You need to be clear in your assessment."

(source: Reuters)