SINGAPORE — Policymakers in the Asia-Pacific region are facing their toughest test since the COVID-19 pandemic, with few easy options, as they race to cushion their economies from an energy shock that is hitting harder and sooner than elsewhere.

Asia buys about 80% of the oil that is shipped through the Strait of Hormuz and, according to J.P. Morgan commodity analysts, it faces shortages that will worsen through April and May – meaning authorities will need to respond swiftly.

In Manila, drivers of jeepneys – colorful, souped-up minibuses – are already facing diesel prices that have tripled. A jet-fuel squeeze looms in Vietnam and South Korea’s major cosmetics firms are searching far and wide for plastic resin to make the pots that hold their famous skincare products.

Like in the rest of the world, the effect of the US-Israeli war on Iran in Asia is the prospect of rising inflation and damaged growth.

Asian currencies – some already struggling – have come under heavy selling, putting them among the largest losers globally. This has brought back memories of the Asian financial crisis and leaves policymakers with some unpleasant choices: Raising rates, spending reserves, or seeing their currencies sink further.

India’s rupee, Indonesia’s rupiah, and the Philippine peso have been pulled to record lows against the dollar this month, along with major troughs for the yen and South Korean won.

“The key problem is Asian currencies were too weak before,” said Alicia Garcia Herrero, Asia-Pacific chief economist for Natixis in Hong Kong.

“The central banks … have no instrument,” she said.

“Economies are going to plummet and … they cannot cut anymore, not only because of the inflationary pressure, but because they had already cut too many times.”

The dollar, one of the few havens in March, has made some of its sharpest gains in Asia – and to historic levels – rising more than 4% against the won, peso, and Thai bahtagainst a gain of around 1.5% on the euro.

NO EASY OPTIONS
There is no simple solution – not least because options short of importing more oil don’t actually fix the squeeze, which is already spilling into prices for plastics and fertilizers.

Responding with higher rates risks slowing an economy when it most needs support. Subsidizing fuel is expensive and in emerging markets or countries with budget pressures, such moves could be received badly by bond investors. Direct currency intervention can also be costly and risky in fickle foreign exchange markets.

“I think the crux of the matter is that there are no easy policy options at this stage,” said Sonal Varma, Nomura’s chief economist for Asia outside Japan.

“Whether it’s the role of currency, monetary policy (or) fiscal policy,” Ms. Varma said. “There will be some macro variables that will take an impact.”

“Each country will essentially need to choose what is the right trade-off that is palatable in their local circumstances.”

So far, Australia has raised interest rates since the war began in late February, with authorities elsewhere in the Asia-Pacific region relying on guidance, currency intervention and unorthodox tools to try to cushion soaring petrol prices and steady financial markets.

South Korea has turned to its massive national pension fund – the world’s third largest – to raise its hedging ratio and protect the won, Reuters reported last week. India and Indonesia have been defending their currencies and making changes to how their markets function, with India capping banks’ currency positions and Indonesia opening a repo market for short-term dollars.

Japan has renewed its intervention threats, with the yen not far from nearly four-decade lows, while the Philippines has declared a state of emergency, let its currency slump to a record low by stepping back from intervention and held a surprise policy meeting last week to warn it was ready to act.

“I don’t think there is a clear blueprint on how to respond to a crisis like this,” said Fred Neumann, chief Asia economist at HSBC in Hong Kong.

“I think there is a recognition in Asia that you can’t really change fundamentally the course of exchange rates. All you can do is lean a little bit against the wind.”

To be sure, most of Asia has healthy foreign-exchange reserves and there are no parallels for the pegged currencies and dollar debts that sent capital rushing for the exits nearly thirty years ago.

India had roughly $698 billion in reserves as of March 20, according to the latest available data, which would cover more than 11 months of imports, while Indonesia and the Philippines each have more than six months of import cover in foreign currencies.

But with direct intervention in the currency markets likely to be futile in the face of strong dollar buying due to haven demand, central bankers will need to be creative in their efforts, analysts say.

“Nimbleness is something that is needed from policymakers … Having unscheduled meetings, having more frequent communication with the market is probably helpful,” HSBC’s Mr. Neumann said.

“You don’t want to be overly dogmatic in an environment like this. You need to be clear. You need to be honest in your assessment.” — Reuters