Oil prices are being "fanned" and US debt is being "ignited"! Is it dangerous for many countries in Asia?

Several of Asia's most vulnerable economies are facing increasing pressure, despite the deepening impact of the oil shock triggered by the Iran war on the economy, central banks in these countries are still facing pressure to tighten policies. With the escalating tensions in the Middle East causing a double blow to consumers and businesses, Indonesia, the Philippines, and India are experiencing a crisis of capital outflow and currency depreciation. In the past week, the turbulence in the global bond market has added more pressure to them. The sharp rise in US Treasury yields has pushed up the US dollar exchange rate, reducing the attractiveness of emerging market assets and exacerbating capital outflows in Asia. This increases the burden of repaying debt denominated in US dollars and forces central banks in various countries to raise interest rates to defend their currencies and increase the attractiveness of local debt, even as domestic economic growth is inevitably slowing down putting many Asian policymakers in a difficult situation. Frederic Neumann, Chief Asia Economist at HSBC Holdings, said, "Most economies in the region will face greater pressure, leaving central banks in a painful dilemma of whether to take action and how to cope with soaring inflation pressures. The situation may become more severe. We have not yet emerged from the predicament." Market data shows that high oil prices and inflation concerns have pushed global government bond yields to multi-year highs, with 30-year US Treasury yields climbing to their highest levels since 2007 on Tuesday. The surge in US bond yields has intensified pressure on emerging markets across Asia. Since the Iran conflict, all major Asian currencies except the Renminbi have experienced depreciation with the Philippine Peso, Indian Rupee, and Indonesian Rupiah showing particular weakness. Emergency rate hikes still a temporary solution? After a round of intensive "verbal intervention" and "direct intervention" to defend the Indonesian Rupiah hitting historic lows, markets widely expect the Indonesian central bank to unveil a rate hike this Wednesday. "However, even this will only bring temporary relief," said Jason Tuvey, Deputy Chief Economist for Emerging Markets at Capital Economics. "To stabilize the currency in the long run, policymakers must ultimately abandon populist and interventionist policies." Indonesian Finance Minister Sri Mulyani Indrawati said on Tuesday that the Indonesian government is stabilizing yields and curbing capital outflows through bond buybacks. The central bank of Indonesia has previously attracted more funds to support the domestic currency exchange rate by buying long-term bonds and selling short-term notes. This is similar to the "twist operation" introduced in 2022 when the central bank tried to ease the sharp rise in borrowing costs following the coronavirus pandemic. (In the picture, the US dollar to Indonesian Rupiah exchange rate and changes in Indonesian foreign reserves.) In the Philippines, traders and economists are increasingly discussing whether the central bank might resort to a significant rate hike or an unscheduled hike if pressure on the Peso escalates further. In order to prevent the destructive surge in yields, the Philippine government even rejected all market bids in a rare move at Tuesday's government bond auction. In contrast, India's current defense measures are characterized by strong protectionism: intervening in foreign exchange while erecting walls against commodities, with unprecedented strict controls on the import of gold and silver. Economists are concerned that if international food prices also spiral out of control, these defensive trade barriers could quickly spread throughout Southeast Asia. Economists at Citi Group, led by economist Samiran Chakraborty, suggest that India's future policy options may include tighter capital controls including restricting residents' overseas direct investments and stricter regulations requiring exporters to repatriate foreign exchange income. Chakraborty said the likelihood of such measures being introduced within the next month is "high," adding that although India's foreign exchange reserves are currently at a "reasonably" level, the situation is "gradually worsening." Situations may rapidly deteriorate For emerging markets in Asia, the real horror lies in the fact that the specter of history may never have been far away history has repeatedly shown that once the global financial chain suddenly tightens, market confidence can collapse in an instant. During the 1997-1998 Asian Financial Crisis, countries including Thailand, Indonesia, and South Korea collapsed because of their weakness in filling huge current account deficits and maintaining the exchange rate, leading to the instantaneous dispersal of international investor confidence. Within a few months, the currencies of these countries were severely hit, foreign exchange reserves evaporated overnight, leading to prolonged economic recession, hyperinflation, and disastrous political turmoil. Similarly, the "Taper Tantrum" triggered by the Fed's signal of reducing QE in 2013 also caused capital flight from emerging markets as US bond yields skyrocketed. In that storm, India, Indonesia, and the Philippines suffered the most among the "fragile three." This time, history seems to be repeating itself, as central banks in various Asian countries have already built barriers in advance and increased the intensity of foreign exchange interventions, but in the face of giant waves, their defense lines are on the brink of collapse. Sanjay Mathur, Chief Economist for Southeast Asia and India at ANZGroup, wrote in a report last week: "With foreign exchange reserves significantly depleted and downward pressure from energy prices yet to dissipate, such large-scale foreign exchange intervention will become increasingly difficult to sustain." ANZ Bank's economists predict that by 2026, India and Indonesia's current account deficits will account for 1.9% and 1.1% of GDP respectively, with the Philippines reaching as high as 4%. The Philippines is one of the most severely affected countries globally by the energy shortage shock and is currently facing political turmoil. The impact of oil shocks has dragged the Philippines' GDP growth to its lowest level since 2009 (excluding the pandemic period). The inflation rate has also surpassed 7%, far exceeding the central bank's target range of 2%-4%. In Indonesia, the current government's expansionary fiscal plans including its flagship free meal program have made investors already concerned about the country's debt trajectory and sovereign rating prospects anxious. While India's Modi government has a more stable political base, it also faces multiple pressures: with oil prices possibly exacerbating the fiscal deficit and pushing up inflation, it needs to maintain infrastructure spending and welfare support. Rob Subbaraman, Chief Economist at Nomura Holdings, said, "The lessons of the 'Taper Tantrum' and the Asian Financial Crisis show that the risk premium may rise sharply, seemingly adequate foreign exchange reserves may also be quickly depleted. As people attribute the rising cost of living to the government, continuously increasing cost of living pressures may lead to increasingly turbulent local situations." This article is reproduced from "Cailian News", author: Xiaoxiang; GMTEight editor: Feng Qiuyi.