Asia-Pacific policymakers face the most serious test since the COVID-19 pandemic, with few simple solutions at their disposal. They are rushing to mitigate the effects of the energy shock on their economy, which is hitting the region harder and faster than anywhere else.
Source: Source: https://www.straitstimes.com
Asia buys about 80 percent of the oil transported through the Strait of Hormuz. Commodity analysts at J.P. Morgan said the region faces deficits that will intensify through April and May, meaning authorities need to respond quickly.
In Manila, drivers of jeepneys – bright, powerful minibuses – are already facing diesel prices that have tripled. Vietnam is facing a shortage of aviation fuel, and major South Korean cosmetic companies are actively searching for plastic resin to produce containers for their famous skin care products.
As in the rest of the world, the consequences of the US-Israeli war with Iran for Asia are reflected in the prospect of rising inflation and slowing economic growth.
Asian currencies – some of which were already in trouble – have come under massive sell-offs, among the world’s underdogs. This has revived memories of the Asian financial crisis and leaves policymakers with an unpleasant choice: raise rates, spend reserves, or watch their currencies fall further.
The Indian rupee, the Indonesian rupee and the Philippine peso hit record lows against the dollar in March, along with severe falls in the yen and South Korean won.
For example, the average household living in a 4-bedroom HDB apartment can expect to see a $2.36 reduction in their monthly electricity bill before deducting GST.
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Discounts for utilities will be automatically credited to the accounts of eligible households from the operator of the SP Services network, and discounts for maintenance and improvement in city councils.
More than a million Singaporean households will receive discounts on utilities, maintenance and landscaping in April.
Consumers in Singapore are bracing for the worst as fuel prices soar as a month-long U.S.-Israeli war with Iran destabilizes global energy markets.
«The key problem is that Asian currencies have been too weak before.», said Dr. Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis in Hong Kong.
«Central banks ... have no tools. They can no longer cut rates, not only because of inflationary pressures, but because they have already cut rates too often.».
The dollar, which was one of the few safe havens in March, saw the strongest gains in Asia – to historic levels – rising more than 4 percent against the won, peso and Thai baht, compared with an increase of about 1.5 percent against the euro.
No easy solutions.
There is no easy solution – not least because options that don’t involve importing more oil don’t actually address the scarcity that is already beginning to affect plastic and fertilizer prices.
Rising interest rates risk slowing the economy at a time when it most needs support. Fuel subsidies are expensive, and in emerging markets or fiscally constrained countries, such moves may be viewed negatively by bond investors. Direct foreign exchange intervention can also be costly and risky in volatile foreign exchange markets.
«I believe that the essence of the problem is that there are no simple policy options at this stage.»Sonal Varma, Nomura’s chief Asia economist (excluding Japan) said.
«Whether it is the role of the exchange rate, monetary or fiscal policy, some macroeconomic indicators will inevitably suffer.
Each country will, in fact, have to choose which compromise is acceptable given its local conditions.».
Australia has so far raised interest rates since the war broke out in late February, while other Asia-Pacific countries are relying on market signals, currency interventions and unconventional tools to try to cushion skyrocketing gasoline prices and stabilize financial markets.
As Reuters reported last week, South Korea has asked its huge national pension fund – the world’s third-largest – to raise its hedge ratio and protect the won. India and Indonesia are protecting their currencies and making changes to their markets. India restricts banks’ foreign exchange positions, and Indonesia has opened the repo market to short-term dollars.
Japan has renewed threats of intervention as the yen is close to nearly forty-year lows, while the Philippines declared a state of emergency, allowing its currency to fall to a record low, moving away from interventions, and held an extraordinary meeting last week warning of readiness to act.
«I don't think there's a clear plan for responding to such a crisis.»Fred Neumann, HSBC’s chief Asia economist in Hong Kong, said.
«I think Asia recognizes that it is impossible to fundamentally change exchange rates. All you can do is resist the wind a little.».
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It should be noted that most Asian countries have significant foreign exchange reserves, and there are no parallels with the currency peg and dollar debt that caused capital flight almost thirty years ago.
According to the latest available data, as of March 20, India had reserves of approximately $698 billion (900.34 billion Singapore dollars), covering more than 11 months of imports, while Indonesia and the Philippines have more than six months of foreign currency import coverage.
But given that direct interventions in foreign exchange markets are likely to be futile in the face of strong dollar purchases due to the demand for safe-haven assets, central banks will need to be creative.
«Politicians need flexibility. Holding unscheduled meetings, more frequent communication with the market is probably useful», said Mr. Neumann of HSBC.
«In such a situation, one should not be overly dogmatic. We need to be clear about our position. You need to be honest in your assessments.».
