As chaotic as Thursday’s 7% surge in oil prices was for global markets, it’s the assets that are dropping with comparable force that are really spooking the region.
The reference is to the Indian rupee, Indonesian rupiah, and other key Asian currencies falling to record lows due to the war in the Middle East. The Philippine peso has also tumbled in the two months since the conflict began.
Asia’s most fragile currencies are weakening due to their governments’ heavy reliance on imported oil. They’re weakening, in part, because of chronic fiscal deficits. But the pace of the declines is a warning sign that Asia hasn’t yet seen the worst of the economic fallout.
Some of the complacency reflects China’s stubborn stability. On Thursday, markets got fresh evidence that China’s factory activity is expanding against the odds — and for a second straight month in April. Beijing’s official manufacturing purchasing managers’ index came in at 50.3, above the 50-point mark separating growth from contraction.
Yet Asia is bracing for the moment war in the Middle East slams China’s roughly $20 trillion economy. It’s already happening, of course, just slower than you’d expect as oil prices top $120 per barrel.
China, as many point out, has huge energy reserves that help insulate its economy to some extent. Yet the great vulnerability is that global demand for mainland goods could begin to vanish in short order. In fact, odds are this dynamic will show up very soon.
Even Asia’s most developed economies are increasingly in harm’s way. Suddenly, Japan’s stagflationary trajectory is unnerving markets. To be sure, this is partly because many investors worry that Europe and the U.S. may be heading that way, too.
But the world’s No. 3 economy pivoting from deflation to stagflation in just a couple of years is in no one’s best interest. The same goes for the yen sliding to 160 to the dollar. This has officials in Tokyo hinting at currency intervention.
The yen’s trajectory, of course, is a mystery all its own. In decades past, the yen had been a reliable safe haven during global turmoil. At present, it’s weakening in ways that have markets asking, “What gives?”
Japan’s challenge speaks to how central banks are scrambling to sandbag their financial systems. Yet for nations like India and Indonesia, it might already be too late to stop capital from fleeing some of Asia’s biggest economies.
Officials at Reserve Bank of India headquarters in Mumbai are battening down the hatches. The RBI is curbing speculation to support the currency, including stopping banks from offering the most widely used offshore trading instrument. It’s also opening a dedicated dollar-swap window for oil refiners.
In Jakarta, Bank Indonesia officials are vowing to intensify both offshore and onshore currency intervention efforts. It’s making dollar purchases more difficult. Over in Manila, Bangko Sentral ng Pilipinas officials are signaling a willingness to hike rates both to tame inflation and to stabilize the peso.
It would be easy to label certain economies among Asia’s weakest links and wish them well. But in our increasingly interconnected global economy, what’s happening in India, Indonesia and beyond seems an omen of broader trouble to come.
