Is Asia facing a new currency crisis Counting the Cost

Hey there, I'm Scott McClain. This is Counting the Costs on Aljazeera, your look at the world of business and economics. Asian currencies under pressure. Central banks are spending billions to prevent their decline. But how long can they keep fighting the market? And is this a temporary shock or something more serious? From India to Indonesia, people across Asia are paying the price through higher food bills, costlier fuel, and shrinking purchasing power. So what are governments doing to shield them? And can they turn the tide? The battle over the Strait of Hormuz is hitting Asia where it hurts. It's currencies and people's buying power. Investors are fleeing to the safety of the U.S. dollar or gold as uncertainty over the Iran conflict drags on. And across Asia, currencies are starting to buckle under the strain. The Indian rupee and Philippine peso have fallen to record lows. Indonesia's rupiah is now weaker than it was at the depths of the Asian financial crisis. From Japan to South Korea, central banks have burned billions of dollars trying to slow the tide. For economies that rely heavily on imported energy, a weaker currency means higher costs from food to fuel. And as households begin to feel the squeeze, governments are scrambling to shield consumers while defending their currencies. The crisis at the Strait of Hormuz has sent shockwaves through the global economy. Disruption to 20 percent of the world's oil and gas flows has pushed up prices and constrained supply. Many Asian countries in particular have grappled with fuel shortages and surging inflation. But now a new crisis looms that could make things even worse. Many currencies are under pressure. Oil and gas are usually bought and sold in U.S. dollars. Countries that rely heavily on imports are now paying more, and it's putting a strain on currency reserves. At the same time, investors are pulling money out of emerging markets. Uncertainty about the global economy has made gold and U.S. treasury bonds appear to be a safer option. In February, it took around 90 Indian rupees to get one U.S. dollar. Now just a few months later, it takes around 95. It's a pattern being repeated in the Philippines, Indonesia and many other countries. People are paying the price. When currencies lose value, it pushes up the cost of imported goods, including food and fuel. These food vendors in Jakarta sell tempeh, a traditional Indonesian soy dish. But they say their overheads are going up, and their customers aren't able to pay more. The price of soybeans used to be much cheaper. Around $25 for 100 kilos. But now it has reached as high as $60. As for plastic packaging, it used to cost $1.50 per kilo, and now it has increased to $2.50. We've had to reduce the size of our servings. If we raised prices, people would stop buying it. And those who rely on foreign currency as part of their businesses are quickly finding it's much harder to come by. My business is finished. Foreign currency is the product that we are selling. We buy it, and then we sell it, and the margin that we make is our profit. When we are not able to get the product that we sell, then how do we do business? The Indian government has tried to reduce the amount of money flowing out of the country by increasing duties on imports of precious metals. But that's having an impact on the livelihoods of people in the jewellery sector. If people do not buy jewellery for one year, then what happens to the jewellers, or their staff, the people involved in logistics and the craftsmen associated with this industry? I do not think that Modi thought about their livelihood at all. Central banks are doing what they can. Japan, South Korea and several others have intervened, buying up large amounts of their own currency in a bid to stabilise its value. But doing this requires spending their reserves of US dollars, which could eventually run out. People across Asia are suffering as prices rise and their economies struggle. And the cause is in large part due to a crisis that's far away and beyond their control. Fintan Monahan, Al Jazeera, for counting the cost. All right, let's discuss this further with our guests. We're joined by Alicia Garcia-Herrero. She's the chief economist for Asia-Pacific and the Middle East at Natixis. She's in Taipei. In New Delhi, Biswajit Dhar is an Indian economist and a retired professor from the Jawaharlal Nehru University. And in Jakarta, we're joined by Bima Yudhisthira, the executive director of the Centre of Economic and Law Studies, an Indonesia-based economic think tank. Thank you all so much for being here. Alicia, we will start with you. Look, let me just set the scene here. You have the Philippine peso, you have the Indian rupee, all hitting record lows against the US dollar. Even when you look at two of Asia's, two of the world's most advanced economy, Japan and South Korea, they are also seeing their currencies decline in value in relation to the dollar, despite government efforts to prop up those currencies. So has has this reached crisis levels for Asian economies? I would say not yet. And that's the good news, but it could. And that's the bad news. I think this is not only because of Iran. Let's not forget that most of these currencies were already weak before the 28th of February. And part of that is because central banks were actually front-loading cuts in 2025. So they were kind of feeling that they could do so because the Fed was coming, the Fed was going to cut, but the Fed didn't cut as much as expected. So in a way, they felt that they went too far. And then the Iran shock hit these currencies. I think it is extremely important that the central banks do their utmost, even if that hurts the economy a little bit, I get it. But they need to show their, they need to show their intention, their, their intent to keep those currencies as strong as possible, given that indeed to avoid that, that financial distress or crisis that you were referring to. Professor Dar, help us understand what's going on in India with the rupee there. Is the weakness because India imports 90 percent of its crude oil? Is it because culturally Indians buy a lot of gold, which of course requires foreign currency to import and actually buy? Or is it a combination of other things? No, there are, it's a combination of several things. And part of the problem is that there have been structural weaknesses in the Indian economy. Of course, the government was talking about the current economy being one of the fastest growing in the world. But there have been doubts expressed by a whole lot of analysts that these numbers are not really real. And last year, after the article for consultation with IMF, IMF in fact flagged their concerns about the growth numbers, the way GDP was being estimated in India. So there's a structural weakness, weaknesses which the economy has been suffering from post-COVID. And that only got heightened as, you know, this, this particular crisis, it does. And I think, I generally agree with Alicia that the central bank has to do its utmost to keep the currency strong because already India is facing the largest merchandise trade deficit and this could completely jeopardize the current account if the rupee slide is not controlled. So even at the expense of lowering its reserves to some extent, India has to do its utmost Bima, can we talk about the rupiah? Because you can see that, look, things started to get worse for the rupiah when the Iran war started. But even if you look at the longer view, the currency was weakening for a long time now. So why is there so much weakness there? I think there is a problem of growing fiscal deficit because of the energy subsidies increased dramatically. So before we already net importer of the oil, so we depend a lot on the foreign oil reserves. But when there's a Iran war, I think the deficit in the oil and gas not only suffers rupiah, but also it affected the budget deficit. And the Indonesia government policy domestically with the one gateway of the export of commodity capital control by the central bank to limit up to 25,000 U.S. dollars to be exchanged. So I think those kind of Indonesia internal policy make the rupiah weakening a lot. So we think that there is less confidence from the market, from the investor. And then a lot of the uncertainty in terms of the government's policy, export policy, but also lack of the stimulus package for domestic demand under this time of the inflation began to increase in the food, but also in the logistic costs. Alicia, this conversation can get pretty complicated. Obviously, there is a lot that impacts currency values, imports, exports, bond yields. But I wonder if it's not just a lot simpler than that. Does it not come down at the end of the day to supply and demand? I mean, if governments were to stop taking debt, stop printing money to inflate their way out of that debt, would that not solve the problem here? Let me let me say something that unfortunately confirms that things are more complicated than that. Actually, if you look at these these countries that we're referring to, one could argue they have current account deficits. You know, it's just logical. They they they you know, as you said, they've gone too far or maybe fiscally, maybe maybe in terms of current account. But let's not forget that you have currencies out there, the Korean won with a massive current account surplus that is weakest ever. Yeah. So so something is happening with these Asian currencies that that is pretty interesting because it's not only the usual suspects you have here. The usual suspects kind of like the other tapering currencies, but no, no, it's even those with current account surpluses that have very weak currencies at the moment. And let me add one reason for this. The US stock market, the US is sucking in so many savings from Asia. So say you were a Japanese investor, maybe, you know, you were interested in the Indian stock market in twenty twenty four. It was actually booming. But nowadays, because of what's happening in the US, a lot of those investors, Korean, Japanese, you name it, are actually going to the US. So that's also one reason which is independent from these countries. Did you see? So I'm not saying there's nothing to be to be blamed about. But there is more than that is the US sucking the savings of the world, which is also weakening these currencies. Yeah. And of course, the US stock market doing very well despite war, despite many problems that the world is facing right now, possibly inexplicably. Some people may say, I just want to take a closer look at what measures two of Asia's largest emerging economies are taking. So we'll start with India, which is betting big on its own people to reduce demand for dollars. So Prime Minister Narendra Modi has appealed for voluntary austerity in a bid to stop money flowing out of the country. He's called on Indians to use less fuel, stop buying gold and avoid traveling abroad. It's also hike duties on gold and silver to 15 percent. India spent more than 72 billion dollars importing gold this past year alone. Government has increased fuel prices several times after keeping them low for the first two months of this crisis. India imports nearly 90 percent of its oil and around half its natural gas. So it is among the countries that are really feeling the pressure here. So this was Prime Minister Narendra Modi's appeal to his fellow citizens. Listen. There is a need for all of us to come together and fulfill our responsibility to reduce the burden on the country's resources. You know that India spends billions of rupees in foreign exchange to import many products. At the same time, the prices of imported goods are soaring and global supply chains have also been severely disrupted. So, Professor Dar, the prime minister there is saying spend more money in India, buy less things that are imported. Is this sort of voluntary austerity, these voluntary measures likely to actually work? I don't think this is going to work. You know, gold is not just being used for social purposes, for weddings and all. Gold has also become a safe haven for investors. And the stock market has been collapsing for several months now. Gold has been the safe haven for the investors. So this is not going to happen. It's impossible to expect Indians to stop or reduce consumption of edible oil, because if you reduce consumption of edible oil, then you, of course, will reduce your consumption of food. It's just not possible. And the Indians have got addicted to traveling abroad. You know, come the summer months, they have to travel abroad. And the middle class, which has benefited from, you know, the economic expansion, you know, now just looks for destination abroad. It doesn't go for holidays within the country. So all that, you know, the prime minister listed in terms of austerity and reducing foreign currency spending, that is not going to work. Even Make in India, that story, hasn't actually worked very well, because we started this Make in India thing and, you know, the self-reliance, this slogan, which was given in 2020, that hasn't really worked as per planned. We still import a lot of electronic products and components, you know, mobile phone manufacturers in India basically assemble the mobile phones after importing parts and components. So really, this Make in India story is not going very far. So I don't think that, you know, what the prime minister has urged citizens to do is really going to work. In fact, I was a bit worried that it's going to give strong, strong signals to the investors. Sure. Alicia, I wonder, is there a sweet spot here for India? Because obviously a weaker currency makes its exports more attractive. But you don't want to be so weak that you can't afford to buy imports either. Is there kind of a sweet spot that maybe India is aiming for? I'm afraid that India went beyond the sweet spot. The currency is too weak. And when you have a current account deficit, not because you have a weak currency, you're going to export. You need to have the industrial capacity. India's industrial production is around 18 percent of GDP. It's very low. So the currency is not going to push those exports that you need to balance the current account deficit. So no, a weak currency for India. The only positive, we need to find a positive, is that it could attract foreign direct investment. We had some good news on that front, but people need to believe that the currency is going to be stronger so that they invest at the weakest point. So they need, the government needs to give a signal. And the only signal, frankly, unfortunately, is you need to hype rates. You just need to show your intent. Again, it's not enough to expect people to follow these policies of, you know, kind of dispel the dollar. You need to show that you really believe it. And that the easiest way is to hype rates, which will hurt the economy. But I think it's better than having a very weak currency for too long. I want to ask you guys about Indonesia. Indonesia is taking a different approach to India. It is increasing state control over exports, which has been criticized as a sharp surge in resource nationalism. So the government accuses companies of avoiding taxes by selling underpriced commodities to affiliates abroad who then resell globally at a markup. A state run agency has been set up that will be the sole buyer of Indonesian commodities. That way, the state gets to export them and reap the profits. It will initially cover coal, palm oil and certain nickel products, all of which Indonesia is the world's largest exporter of. All foreign currency that comes in from this will be deposited in state owned banks, which is an effort to prop up the value of the rupiah. So Bima, what do you think of this? Is this likely to work? Has it shown signs of working already? No, actually, they try to postpone and then one getaway of the export or resource nationalism that's been going on in Indonesia. I think there is a lot of criticisms and a lot of new input, especially from the investors, but also from the export led commodity. Because we think that if this is the moment that the commodity like coal, palm oil, nickel products should be increased in terms of the price. But the government thinks that it is better to fight the underpriced and also controlling all the foreign reserves in terms of the export of Indonesia commodity. So instead of giving like a stimulus package or increasing like ministerial levels monitorings of all the commodities, the Indonesian government thinks that it is better to have like a state control. I think that's weakening more rupiah prices, but also the capital outflow from the stock market, especially the stocks related to the commodity base. So I will say that there is no windfall this time for the major Indonesia commodity. Instead, I think a country like Malaysia for the palm oil and the other countries also enjoying more kind of a windfall from the high price because the Indonesian government thinks that instead of going for exporting more palm oil, Indonesia want to tackle the deficit of the oil and gas by switching to national biofuel, which is also kind of problematic at the moment. So the government that use state control, I think the problem is on the government policy itself. But right now, everyone, I or everyone is blaming the central bank. But actually, the central bank did all all the all the monetary policy. But the problem is on the on the fiscal side and also in the export state control mechanism. Indonesian President Prabowo Subianto spoke about the rupiah's weakness at two events during a visit to East Java province in May, where he really downplayed the impact on villagers that has sparked a backlash on social media. So he told them this, quote, however many thousands of rupiah the exchange rate to the dollar is. You folks in villages do not use the dollar anyway. He later added, quote, believe that our economy is strong. Our fundamentals are strong. Whatever people say, Indonesia is strong. Alicia, obviously, Indonesians do not use the dollar. But clearly, if you have a weak currency, you're buying power abroad is less for things that you import. Are Indonesians right to be offended by the president? Maybe trying to pull the wool over people's eyes there? Well, I'm not Indonesian and I'm nobody to judge if you see what I mean. But but let's be frank, we currency if you need to import is is, of course, hurting the purchasing power of not only Indonesian, also Japanese at the current juncture, meaning this is not about Indonesia. This is a this is the law of gravity, you know. So so but but I quite agree with the fact that this is not only the central bank in the case of Indonesia, I would argue the central bank cannot solve this problem. The case of India, because the fiscal deficit has been shrinking is big, but shrinking. I would argue that the central bank has more room and, you know, it's been intervening. I don't know that I would say for Indonesia, I quite agree that what what I would do is exactly the opposite on the export control part. I would open Indonesia to foreign investment. I would actually try to get as much as FDI as possible rather than control the exports of what Indonesia really has to offer today, which is all of these commodities. So for me, that policy is not helping. I very much agree with that. I want to go back in time for a second to 1991, because India at least has been here before. So I want to show you a graphic of the USD to Indian rupee conversion rate. So if you look at the left side of this chart, that first spike there, that was 1991. And basically the Gulf War caused the price of oil to surge. Also, the collapse of the Soviet Union around the same time caused exports to really slump. And there really was no emergency break here because India only had enough foreign reserves to cover about three weeks worth of imports. Now it has about 11 months worth of imports. But I wonder, Bhima, are you concerned that there are countries in Asia that don't have that much of a runway in terms of their foreign currency reserves to back their own currency or to buy up their own currency to prop up their values? Yeah, of course, I think many of the emerging countries even thought we have like 5 percent more GDP growth. But the big question is how much the international debt and short term debt payments. Because in the Indonesia context, for instance, that this year and next year, there will be like a high debt maturity for Indonesia governments, but also on the state-owned enterprise and private sectors. So I think the problem right now is how much money that we need, either coming from tax, either coming from export activities that can help stabilize the rupiah, stabilize the currency, local currency. I think that's kind of a big challenge. And then when we compare with 1998 ASEAN financial crisis, I think Indonesia, yes, grows stronger in terms of the currency reserve by the central bank. But when there is a sudden shock in the bond market and then many of the rating agency right now is trying to analyze how the fiscal space can save if there is like a sudden shock, but also the monetary space that can be used in terms of the emergency. So this is like a crucial moment. But for the Indonesian context, instead of giving more room for private sectors to gather all of the export, gather all of the new investment, they try to block all the things that can create more fresh money from abroad. So I think the capital control, it is similar tactics that being done during the ASEAN financial crisis. But we are more integrated on the global financial system that make it very, very difficult if we use capital control again during this time. I think it can be a backlash for many of the emerging economy in Southeast Asia, especially Indonesia. Alicia, do you think that some of this could be solved by some of these Asian economies requiring exports to be purchases of their exports to be settled in their own currencies rather than U.S. dollars? I mean, wouldn't that have the effect of increasing demand for their own currencies rather than sort of inadvertently propping up the value of the dollar? Yeah, it's a good suggestion, but you cannot do that in a stressed situation because the reading will be negative. Of course, there is something already happening, which is the RMB as a settlement guarantee for trade. The RMB already surpassed the euro as the second most traded currency for trade settlements only. So that's a possibility. Many of the central banks have swap lines with the PBOC. But the trick, nothing is for free. There's no free lunch here. The trick is then you get a non-convertible currency and what you can purchase comes from that very same country. So, you know, the dependence on China increases and it's certainly not the same to have, you know, if you export, say, to accumulate dollars, which you need, say, in Indonesia to pay their foreign debt than accumulate RMB. So that's that's why there's always, you know, there is a tradeoff in basically switching to RMB. It is a complicated discussion, but I certainly appreciate the wisdom from all of you. Alicia Garcia-Herrero, chief economist for Asia-Pacific and the Middle East at Netixas. Baswajit Dhar, retired professor from the Jawaharlal Nehru University and Bima Yudhishtira, executive director of the Center of Economic and Law Studies. Thank you all again for being here. We appreciate it. And that is it for our show. Get in touch with us on X at Scott McLean. And do use the hashtag AJCTC when you do or drop us an email. Counting the cost at aljazeera.net is our address. But there's more for you online at aljazeera.com slash CTC. That'll take you straight to our page, which has individual reports, links and entire episodes for you to catch up on. All right, that is it for this edition of Counting the Cost. I'm Scott McLean from the whole team here in Doha. Thank you so much for watching. The news is next here on Al Jazeera.