The Iran conflict is intensifying pressure on Asian emerging markets, pushing some currency exchange rates and bond yields toward levels previously considered improbable. As the conflict persists, some analysts are modeling more extreme bearish scenarios. These include: the Indian Rupee potentially depreciating to 100 per US dollar, the Indonesian Rupiah possibly falling to 18,000 per US dollar, and the Philippine Peso potentially weakening to 65 per US dollar. Elevated energy prices are driving inflation higher and weighing on import-dependent economies.
The bond market is also under strain. India's benchmark government bond yield could retest its 2022 high, while the head of the Money Market Association of the Philippines indicated that Philippine bond yields might climb toward 8%, reaching multi-year highs.
Since the war's outbreak in late February, Asian markets have been impacted by a surge in crude oil prices exceeding 40%. India, Indonesia, and the Philippines are particularly affected due to their reliance on foreign capital to finance current account deficits. Concurrently, rising US Treasury yields are further diminishing the appeal of emerging market assets, compelling central banks to tighten monetary policy even as the conflict hampers economic growth.
Indonesia has already taken action to defend the Rupiah. The central bank unexpectedly announced a significant interest rate hike on Wednesday, exceeding market expectations, and pledged to intensify foreign exchange market interventions.
Rajeev De Mello, Global Macro Portfolio Manager at Gamma Asset Management SA, stated that if energy prices continue to rise, "the worsening of import costs relative to export prices will persistently weigh on the currencies of net oil-importing countries." He also noted that higher crude oil prices could adversely affect bond markets by fueling inflation; in countries where governments absorb part of the shock through fuel subsidies, this could lead to wider fiscal deficits.
Since the conflict began, the Indonesian Rupiah, Indian Rupee, and Philippine Peso have been among the worst-performing emerging market currencies, with cumulative declines ranging between 5% and 6.5%.
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