Surging oil prices and plunging currencies: Could Asia face a repeat of the 1997 financial crisis?

One month after suffering the worst oil supply disruption since the Arab oil embargo in the 1970s, economic pain spreading across Asia is reviving an unsettling question: Could 1997 repeat itself?

These similarities are hard to ignore. Asian currencies are under pressure, increasing the risk of capital outflows. Surging energy prices have forced governments to introduce emergency measures while central banks are depleting their foreign exchange reserves. In Thailand, policymakers have begun rationing gasoline. Meanwhile, soaring oil prices in the Philippines have prompted the government to declare a state of national emergency.

Across the region, widening trade deficits and rising inflation expectations evoke memories of the Asian financial crisis that began in 1997.

But economists say these parallels may be mostly superficial, as more flexible exchange rate regimes and larger foreign exchange reserves provide a buffer that helps absorb some of the shocks.

“There are many kinds of crises, and this (Iran) crisis is of a completely different nature,” said David Lubin, senior fellow at Chatham House. He noted that the 1997 crisis was driven by a “toxic combination of fixed exchange rates, high levels of short-term external debt, low foreign exchange reserves, and large current account deficits.”

“Today, Asian economies – precisely because of the lessons left by the late 1990s crisis – are better protected.”

Fesa Wibawa, fixed income portfolio manager at Aberdeen Investments, said that the region’s financial architecture has also “undergone substantial evolution over the past three decades,” featuring deeper local markets, a broader domestic investor base, and significantly reduced reliance on short-term foreign funding.

This, he said, reduces the risk of sudden capital outflows and forced deleveraging that characterized the 1997 crisis.

Financial Shock vs. Real Economy Shock

Brad Setser, senior fellow at the Council on Foreign Relations, said that the 1997 crisis was a shock to the financial account, with bank funding inflows drying up. However, the current crisis is a shock to the current account, as inflows of oil and refined products have been cut off.

“One was a financial shock, and the other was a real economy shock or supply shock. For the most affected Asian economies, the impact of the 1997/98 crisis was much greater,” he told CNBC via email.

In 1997, Southeast Asian economies accumulated substantial short-term US dollar-denominated debt, backed by quasi-fixed exchange rate regimes and thin reserve buffers. When speculative attacks surged, Thailand, Indonesia, the Philippines, and Malaysia were forced to abandon their currency pegs, triggering a chain reaction of defaults and deep economic contractions, further exacerbated by austerity programs from the International Monetary Fund.

The primary challenge facing Asia in the current crisis is the effective blockade of the Strait of Hormuz, which has cut off about one-third of the oil supply required for the region’s economies. Of the 30 million barrels of oil needed daily, approximately 10 million barrels are unable to pass through this critical channel. Prices of diesel and jet fuel have also surged recently, with supply shortages creating ripple effects across Asia.

Reserve buffer

According to Federal Reserve data, as of the end of January, South Korea’s foreign exchange reserves exceeded $400 billion, a significant increase from the $30-40 billion level during the 1997-1998 crisis. South Korea’s local currency bond market has also grown to approximately 3,500 trillion Korean won (about $2.3 trillion), with foreign investors holding around 21% of outstanding bonds—a buffer that did not exist in the late 1990s.

Since the outbreak of the war, after a series of interventions by the Reserve Bank of India to support the rupee, India’s foreign exchange reserves stand at approximately $688 billion. The foreign exchange reserves of countries such as Indonesia, the Philippines, and Thailand have also increased significantly compared to three decades ago.

Unlike the late 1990s, when many Asian economies held large amounts of US dollar-denominated debt (meaning currency depreciation would exacerbate financial distress), most countries in the region have now built up US dollar reserves. While currency depreciation is uncomfortable, it can provide some trade benefits rather than amplifying financial losses.

Dan Wang, Director of China Affairs at Eurasia Group, stated that exchange rate reforms have also strengthened the region’s resilience. The worst-hit economies in 1997 operated under quasi-fixed exchange rate systems, forcing central banks to deplete reserves to defend their currencies. When reserves ran out, currencies collapsed.

Today, most Asian currencies are allowed to float more freely, meaning they can absorb pressure through gradual depreciation, reducing the risk of collapse under the strain of defending a pegged exchange rate. Heftier foreign exchange reserves also provide central banks with additional assurance to defend their currencies.

“During the oil shock, ample reserves—especially in Thailand and the Philippines—avoided the need for aggressive interest rate hikes to defend currency pegs,” said Dan Wang. “The issue these countries face now is potential stagflation, but the financial system remains intact.”

Stagflation risk

However, economists have warned that Asian economies are bearing the brunt of the prolonged conflict in the Middle East, as this oil-dependent region faces physical shortages of key energy inputs, which could increase the risk of stagflation.

Alicia García-Herrero, Chief Economist for Asia-Pacific at Natixis, stated that although the crisis is not of their own making, fiscal space is more constrained than in 1997 due to high levels of public debt and limited room for aggressive stimulus. She noted that Indonesia and the Philippines appear most vulnerable, with risks concentrated in capital outflows, currency pressures on the rupiah and peso, and tightening fiscal buffers used for subsidies.

However, she said that investor positioning across the region remains cautious rather than panicked, with modest outflows from Indonesian bonds offset by mild net inflows into regional equities. “There are no signs of widespread capital flight,” she said.

Indonesia’s energy subsidy budget of 381.3 trillion rupiah for 2026 is based on an assumption of $70 per barrel for crude oil, while officials have warned of a worst-case scenario of $92 per barrel. After a two-week ceasefire agreement between the US and Iran, Brent crude futures for June delivery traded at approximately $97 per barrel on Thursday.

The Philippines, one of the economies in the region most exposed to oil risks, has also seen a rapid rise in fuel prices, while the government has limited room to expand subsidies. The country’s overall inflation rate surged to 4.1% in March, the highest in 20 months, up from 2.4% in February.

Uneven impact

The oil shock will not affect every country equally. Industry veterans say that Malaysia and Singapore appear less vulnerable to energy supply shocks due to their current account surpluses, robust strategic reserves, and more diversified energy sources.

Alicia noted that Singapore, with its diversified growth model and strong institutions, is among the most resilient economies, while Malaysia benefits from its status as an energy exporter and continued inflows of investment related to semiconductors and artificial intelligence.

Robin Brooks, Senior Fellow at the Brookings Institution, said that the oil shock could ripple beyond Asia. He added that if Iran were to attack a tanker in the Strait of Hormuz, “we would see a spike in oil prices and emerging market currencies would be severely impacted.”

Brooks noted that emerging market currencies may face significant pressure, forcing central banks to sell U.S. Treasuries to raise dollars to defend their domestic currencies. The selling pressure could push up U.S. Treasury yields and create a ripple effect across the global bond market.

Vibhavasu stated that today’s capital flows ‘appear more volatile and market-driven, though not as disruptive overall as in the past.’ He described recent exchange rate movements as part of a market adjustment rather than a sign of brewing systemic pressures.

Vibhavasu also pointed out that the characteristics of the 1997 crisis—widespread currency mismatches, unhedged foreign exchange exposures, and lack of transparency—are no longer present today.

Lessons from 1997

The Asian Financial Crisis—one of the most severe emerging market shocks of the 20th century—prompted policymakers in the region to build fiscal and financial buffers over the subsequent decades, which are now being tested. The key question is how long the shock will persist and whether physical energy shortages can be resolved before economic losses spiral out of control.

“There is little time left to ease tensions to avoid inflicting major damage on the global economy,” said Rob Subbaraman, chief economist at Nomura. He added that the spike in energy prices has already lasted long enough to have a significant impact on the global economy.

“If the U.S. further escalates the conflict and/or deploys ground troops, the initial inflationary spike could quickly evolve into a growth shock,” he said.