Oil Price Surge Drags Down Asian Emerging Market Currencies and Bond Markets

Since the outbreak of the war in Iran at the end of February, crude oil prices have soared by more than 40%, with emerging markets in Asia that rely on external funds being the first to be affected. High oil prices have pushed up inflation and widened current account deficits, with the Indian Rupee, Indonesian Rupiah, and Philippine Peso depreciating by 4.5% to 6.5% since the start of the conflict.

Capital is accelerating its withdrawal. India's and Indonesia's government bond markets have respectively experienced capital outflows of $1.2 billion and over $500 million, with the average yield on 10-year government bonds in seven Asian countries climbing by more than 120 basis points.

Institutional warnings are becoming increasingly pessimistic. Aberdeen Investments estimates that the Indian Rupee could fall against the US Dollar to 100, BNY Mellon strategist Wee Khoon Chong believes that the Indonesian Rupiah may touch 18,000 in the short term, and Gamma Asset Management points out that the Philippine Peso could break through 65 and bond yields might rise to 8%.

Central banks in various countries have taken successive actions. The Bank of Indonesia unexpectedly raised interest rates this week and increased market intervention, with President Prabowo Subianto also announcing tightened controls on commodity exports to stem the annual capital outflow of about 150 billion USD. The market expects the Reserve Bank of India to follow suit with a rate hike in June, with India's swap market having already priced in an interest rate hike of 125 basis points over the next year, and the Philippines also faces pressure to tighten.

Nomura economist Sonal Varma points out that the foreign exchange reserves and debt structure of Asian countries currently are far superior to that during the 1997 Asian financial crisis. However, if oil prices remain high, the situation of asset prices being under pressure will be hard to change.