A month after the worst oil supply disruption since the 1970s Arab embargo, economic pain across Asia is reviving uncomfortable questions. “Could this be 1997 again?” It’s hard to ignore the similarities. Asian currencies are under pressure, increasing the risk of capital outflows. Rising energy costs have prompted governments around the world to take emergency measures, while central banks are drawing down foreign exchange reserves. In Thailand, policymakers are moving to ration gasoline. Meanwhile, the government declared a national emergency due to soaring pump prices in the Philippines. Widening trade deficits and rising inflation expectations across the region are reminiscent of the Asian financial crisis that began in 1997. But economists say the similarities may be mostly superficial, with more flexible exchange rate regimes and deeper foreign exchange reserves providing a cushion to absorb some of the shocks. “A crisis can take many forms, but this (Iran) crisis is quite different,” said David Rubin, a senior fellow at Chatham House. He pointed out that the events of 1997 were caused by a “toxic mixture of fixed exchange rates, high levels of short-term external debt, low levels of foreign exchange reserves, and a growing current account deficit.” “Asia’s economies are much better protected these days, precisely because of the legacy of the late 1990s crisis.” Fesa Wibawa, fixed income investment manager at Aberdeen Investments, said the region’s financial structure had also “evolved significantly over the past 30 years”, with deeper local markets, a wider domestic investor base and much less reliance on short-term funding from abroad. This will reduce the risk of sudden capital flight and forced deleveraging that characterized the 1997 crisis, he said. Financial and physical shocks The 1997 crisis shocked financial accounts, causing capital inflows from banks to dry up. But Brad Setzer, a senior fellow at the Council on Foreign Relations think tank, said the ongoing crisis is shocking the current account balance as inflows of oil and products have dried up. “One is a financial shock, the other is a physical or supply shock. And for the Asian economies, which were the most affected, the 97/98 (crisis) was a much bigger shock,” he told CNBC in an email. In 1997, Southeast Asian countries had accumulated large amounts of short-term dollar debt, supported by semi-fixed exchange rates and dangerously thin reserves. As the speculative trades piled up, Thailand, Indonesia, the Philippines and Malaysia were forced to abandon their currency pegs, triggering cascading defaults and severe economic contractions that were made worse by the International Monetary Fund’s austerity program. The main challenge for Asia in the current crisis is the effective blockade of the Strait of Hormuz, which is holding up about a third of the oil supplies needed by the region’s economy. Of the 30 million barrels per day needed, about 10 million barrels are not flowing through the arteries. Diesel and jet fuel prices have also soared in recent days, with supply shortages spreading across Asia. According to the U.S. Federal Reserve, South Korea’s foreign exchange reserves amounted to more than $400 billion as of the end of January, a sharp increase from about $30 billion during the 1997-1998 crisis to $40 billion. South Korea’s local currency bond market has also grown to about 3.5 trillion Korean won ($2.3 trillion), with foreign investors holding about 21% of outstanding bonds, a cushion that did not exist in the late 1990s. India’s foreign exchange reserves remain at about $688 billion following a series of interventions by the Reserve Bank of India, which began supporting the rupee since the war began. Countries such as Indonesia, the Philippines and Thailand also have significantly larger reserves than they did 30 years ago. Unlike in the late 1990s, when many Asian countries had large amounts of dollar-denominated debt, meaning currency depreciation increased financial pain, most countries in the region now have built up dollar reserves. Although a weaker currency is unpleasant, it can result in trade benefits rather than greater economic losses. Eurasia Group’s China director Dan Wang said exchange rate reform had also strengthened the region’s resilience. The most affected economies in 1997 had semi-fixed exchange rates, forcing central banks to spend foreign exchange reserves to protect their currencies. When foreign exchange reserves ran out, the currency collapsed. Most Asian currencies are now allowed to move more freely, allowing them to gradually weaken and absorb pressure, reducing the risk of collapse under the strain of their guarded pegs. The expansion of foreign exchange reserves also provides an additional layer of protection for central banks to protect their currencies. “During the oil crisis, Thailand and the Philippines in particular had sufficient foreign exchange reserves, which avoided the need for aggressive interest rate hikes to protect the peg,” Wang said. “The problem these countries (currently) face is the possibility of stagflation, but their financial systems remain intact.” Risk of stagflation Still, Asian economies are exposed to the brunt of a protracted Middle East conflict, economists warn, as the oil-dependent region faces a physical shortage of primary energy inputs, potentially increasing the risk of stagflation. Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis Bank, said that while the crisis was not self-inflicted, fiscal space was much more constrained than in 1997 due to rising public debt levels and limited room for aggressive stimulus. He said Indonesia and the Philippines appear to be the most vulnerable, with risks focused on capital outflows, currency pressure on the rupiah and peso, and tighter fiscal buffers against subsidies. However, Garcia Herrero said investors across the region remained cautious without panicking, with selective outflows from Indonesian debt being offset by modest net inflows into regional equities. “Widespread capital flight is not yet clear,” he said. Indonesia’s 2026 energy subsidy budget of Rp 381.3 trillion assumes an oil price of $70 per barrel, but authorities have given a worst-case scenario of $92. Brent crude oil futures for June delivery were hovering around $97 a barrel on Thursday after the United States and Iran reached a two-week cease-fire agreement. In the Philippines, one of the region’s most oil-rich countries, fuel prices are also rising rapidly, leaving limited room for the government to increase subsidies. The country’s headline inflation rate rose to 4.1% in March, the highest level in 20 months, up from 2.4% in February. @LCO.1 YTD Mountain Oil shocks do not hit all countries equally. Malaysia, Singapore and China appear to be less vulnerable to energy supply shocks, industry veterans say, thanks to current account surpluses, strong strategic reserves and more diversified energy sources. Garcia Herrero said Singapore stands out as one of the most resilient economies due to its diverse growth model and strong institutions, while Malaysia also benefits from its status as an energy exporter and continued inflows into semiconductor and AI-related investments. Robin Brooks, a senior fellow at the Brookings Institution, said the oil shock could have ripples beyond Asia, adding that if Iran attacked oil tankers in the Strait of Hormuz, “oil prices would skyrocket and emerging market currencies would be hit hard.” Brooks said emerging market currencies could come under significant pressure, and central banks could be forced to sell U.S. Treasuries to raise dollars to protect their currencies. Selling pressure could push up U.S. yields and spill over into global bond markets. Wibawa said that today’s capital flows are “generally less volatile than in the past, but they are more volatile and market-driven.” He explained that recent currency movements are part of a market correction rather than a sign of deepening systemic stress. Wibawa also pointed out that the large currency discrepancies, unhedged foreign currency exposures and lack of transparency that characterized the 1997 crisis are absent. Lessons from 1997 One of the worst emerging market shocks of the 20th century, the Asian financial crisis, led policymakers in the region to spend the next several decades building monetary and fiscal buffers that are now being tested. The question now is how long the shock will last and whether the physical energy shortage can be resolved before the economic damage gets out of control. “Time is running out to de-escalate the situation to avoid significant costs to the global economy,” said Rob Subbaraman, chief economist at Nomura Bank, adding that the rise in energy prices has been going on long enough to have a significant impact on the global economy. “If the US escalates further or puts its boots on, the initial inflation spike could quickly turn into a growth shock,” he said. —CNBC’s Sam Meredith contributed to this report.
