Iran War Hits Asia Faster, Currencies Weaken and Oil Prices Soar

JAKARTA - The impact of the Iran war has begun to hit the Asia-Pacific economy first. This region is now facing a double blow, namely soaring oil prices and continued currency weakness. For many governments in Asia, the situation is complicated. Policy options are narrow, but pressure comes first.

The Straits Times quoted Monday, March 30, reported that Asia bought about 80 percent of the oil shipped through the Strait of Hormuz. According to J.P. Morgan commodity analysts, the region is threatened by a shortage of supplies that could worsen until April and May. This means that authorities in many countries must move quickly.

The pressure is already felt on the ground. In Manila, jeepney drivers face a three-fold increase in the price of solar. In Vietnam, the threat of a shortage of aircraft fuel is looming. In South Korea, large cosmetics companies are busy looking for plastic resin for the packaging of their skin care products.

Like other regions, Asia is also facing the threat of rising inflation and disrupted growth. However, the impact in Asia is sharper because the region's dependence on imported energy is very large.

The Straits Times said that Asian currencies, which were already fragile, were now dragged deeper. The Indian rupee, Indonesian rupiah, and Philippine peso in March hit record lows against the US dollar. The Japanese yen and South Korean won also fell to low points.

"The main problem is that Asian currencies have been too weak since the beginning," Alicia Garcia Herrero, chief economist for Asia-Pacific Natixis in Hong Kong, told The Strait Times. According to Alicia, the central bank also does not have much room because inflationary pressures make interest rate cuts more difficult.

The US dollar, which has again become a safe asset, strengthened sharply in Asia. The increase was even more than 4 percent against the won, peso, and Thai baht, far above the strengthening against the euro.

The problem is, there is no easy way out. Raising interest rates risks suppressing the economy when support is needed. Fuel subsidies are expensive and can hit the budget. Intervention in the foreign exchange market is also risky and drains foreign exchange reserves.

"I think the crux of the matter is that there is no easy policy choice at this stage," said Sonal Varma, Nomura's chief economist for Asia outside Japan.

The Straits Times said Australia had raised interest rates since the war broke out in late February. South Korea used its national pension fund to help protect the won. India and Indonesia also defended their respective currencies while changing market mechanisms. Japan again signaled intervention, while the Philippines declared a state of emergency and held a sudden policy meeting.

HSBC Asia economist Fred Neumann told The Straits Times that there is no clear blueprint for dealing with a crisis like this. According to Neumann, Asian countries can basically only hold the rate of weakening, not completely change the direction of the market.