Is the ghost of the 1997 Asian financial crisis returning? The "perfect storm" of US bond yields breaking 5% and oil prices strangling: Indian, Indonesian, and Filipino currencies hit historic lows.

In May 2026, three of the most vulnerable emerging economies in Asia are being swept by a "perfect storm". On one side, the Iran war continues to escalate, with the Strait of Hormuz being effectively blocked for over eleven weeks, causing energy costs to soar and impacting the economies of oil net importers such as Indonesia, India, and the Philippines. On the other side, the global bond market is in turmoil, with the 30-year US bond yield surpassing 5% for the first time since 2007, the US dollar gaining strength, and emerging market assets losing attractiveness, leading to a capital flight from these structurally vulnerable countries. The destructive force of this storm is most visible in the currency markets. Almost all currencies in Asia are depreciating, with the Indonesian rupiah, Indian rupee, and Philippine peso leading the way. The Indonesian rupiah continued its downward trend, reaching a historic low of 17730 against the US dollar on Tuesday; the Indian rupee hovered near its historic low of 96.3; and the Philippine peso hit consecutive record lows last week. Rising energy prices have led to a 13% cumulative decline in the Bloomberg Philippine Bond Index, making it the worst performer among emerging Asian countries. Jason Tuvey, Deputy Chief Economist for Emerging Markets at Capital Economics, warns that rate hikes can only provide temporary relief, while Rob Subarman, Chief Economist at Nomura Holdings, bluntly states that risk premiums may rise rapidly and reserves may deplete quickly, leading to political instability. The Triple Storm hits simultaneously The first wave: Energy supply compromised, unprecedented oil shock Since the joint military actions by the US and China on February 28 to strike Iran, the Strait of Hormuz a strategic chokepoint that carries nearly 30% of global oil shipments has effectively been closed for over eleven weeks. Global oil inventories are plummeting at a rate of around 4.8 million barrels per day, and the International Energy Agency estimates total oil export losses have exceeded 13 million barrels per day, creating the largest supply disruption in history. Morgan Stanley has warned that if the Strait of Hormuz remains closed, international oil prices could spike to $150 per barrel. For countries like India (which relies on imports for about 85% of its crude oil), Indonesia (a net oil importer), and the Philippines (with a very low energy self-sufficiency), Brent crude oil prices remaining above $100 per barrel mean a worsening of import bills. Reuters reports that with oil prices at high levels, India's monthly crude oil import bill could increase by $12 to $13 billion. The second wave: Global bond market storm, accelerated capital flight US CPI soared to 3.8% year-on-year in April, with core CPI remaining at 2.8%, exceeding expectations for overall inflation and triggering market fears of the US Federal Reserve being forced to reverse its policy direction. Over the past week, the 30-year US Treasury bond yield climbed to 5.16% (the highest since 2007), the 10-year yield rose to 4.59%, and the most interest-sensitive 2-year yield broke through 3.95%. The surge in US bond yields has quickly spread to emerging markets: the strong dollar has squeezed the attractiveness of emerging market assets, accelerating capital outflows from Asia, and the costs of servicing dollar-denominated debt have sharply increased. Central banks are forced to use foreign exchange reserves or raise interest rates to defend their currencies, but this further suppresses domestic economic growth, creating a vicious cycle of "stagflation". The third wave: Combined with political turmoil, confidence deteriorates rapidly Apart from pressures on oil prices and currencies, each country faces unique domestic challenges. Vice President Sara Duterte of the Philippines is embroiled in an impeachment case, and a change in the Senate leadership has significantly narrowed the path to conviction, exacerbating investors' concerns about policy continuity; controversial remarks by Indonesian President Prabowo "villagers are not affected by depreciation" have raised doubts about the government's policy direction; Indian Prime Minister Modi, in a rare move, has called on the nation to "temporarily refrain from buying gold, reduce outbound tourism," signaling a nervousness at the decision-making level. Frederic Neumann, Chief Asia Economist at HSBC Holdings, states, "The economic growth of most regions in the region will face greater pressure, placing major central banks in a dilemma in dealing with soaring price pressures. The situation may become more severe. We are not out of the woods yet." Dire straits for the three countries: the same storm, different wounds Indonesia: Central bank faces the "most difficult rate decision today" On Wednesday, May 20, the Bank of Indonesia will conclude its two-day meeting and announce its interest rate decision. A survey of 29 economists showed that 16 (a slight majority) expect the central bank to raise interest rates by 25 basis points to 5%, the first adjustment since October 2024. EIU economist Tay Qi Hang bluntly states that the key logic behind the rate hike is the "lack of confidence in the measures of the Indonesian government and central bank to defend the rupiah". However, the pressure to raise rates coexists with real challenges. Indonesia's GDP grew by 5.61% year-on-year in the first quarter of 2026, a reasonable performance; the inflation rate in April remained at 2.42%, still within the central bank's target range of 1.5% to 3.5% thanks to temporary fuel subsidies that have suppressed the transmission of energy prices. But subsidies are financially unsustainable, and the current account deficit has led to a deficit in the balance of payments in the last quarter of last year, with foreign exchange reserves being heavily depleted for exchange rate interventions. Jason Tuvey of Capital Economics points out that even if interest rates rise, it will only provide a "short-lived reprieve" for the rupiah, with the real solution lying in "the authorities abandoning the populist and interventionist policies adopted since President Prabowo took office". In addition, the Bank of Indonesia has restarted a "distortion operation" similar to that of 2022 selling short-term bonds while buying long-term government bonds to support the rupiah and avoid a sharp rise in domestic bond yields. Finance Minister Purbaya also confirmed that the government has begun repurchasing government bonds to curb rising yields and capital outflows. Investors' core concerns are focused on President Prabowo's iconic free nutrition program. The Indonesian government has allocated 335 trillion rupiahs (about $25.1 billion) for this program this year, accounting for nearly 9% of the national budget and nearly four times higher than last year's 71 trillion rupiahs. A special report by Lianhe Zaobao in April pointed out: "There is no such thing as a free lunch, even the free nutrition program for Indonesian children requires a considerable amount of national budget. At a time when the conflict in the Middle East is pushing global energy prices higher, Indonesia needs fiscal space more than ever to cope with rising prices. Who will foot the bill for the free nutrition program?" More seriously, Indonesia is legally required to limit its fiscal deficit to within 3% of GDP, which, coupled with energy subsidies and free nutrition programs, squeezes the limited fiscal space. The Philippines: The specter of stagflation looms, the Treasury forced to "reject bids" The Philippines faces the most severe situation, almost gathering all the elements of the "perfect storm": energy shock, political unrest, currency collapse, and the rapid contraction of fiscal space, all combining to push the economy towards the abyss of stagflation. In terms of inflation, the year-on-year CPI surged to 7.2% in April (a three-year high), far exceeding the central bank's target range of 2% to 4%, driven by soaring fuel, transportation, and food costs. Gasoline and diesel prices have risen by 65.3% and 58.4%, respectively, since the conflict began. In terms of economic growth, GDP grew by only 2.8% in the first quarter, the worst performance in five years, well below the government's minimum target of 5%. The International Monetary Fund (IMF) has significantly lowered its growth forecast for the Philippines from 5.6% to 4.1% for 2026. The currency market is also under heavy pressure. On May 16, the Philippine peso hit a new low against the US dollar for the second consecutive day, reaching 61.59; the Philippine Stock Exchange index (PSEi) fell 38.26 points that day to 5976.77. About one-third of the government's debt comes from foreign creditors and is mostly denominated in dollars. As the peso depreciates, the cost of servicing debt increases simultaneously. ANZ Bank predicts that the Philippines' current account deficit could reach 4% of GDP in 2026. What is more challenging is that the fiscal space under pressures from inflation, growth, and currency is rapidly shrinking. On May 19, when the Philippines Bureau of the Treasury auctioned 7-year government bonds, investors demanded an average yield of 7.915%, significantly higher than the comparable yield the previous day (7.60%, a seven-and-a-half-year high), causing the government to reject all bids totaling 30 billion pesos ($487 million). This was the clearest sign from the bond market: investors are demanding higher risk premiums, and the government cannot accept such high borrowing costs. BMI Research, a subsidiary of Moody's, warns that the ongoing cost-of-living crisis is becoming a "major driver of rising social and political risks" in the Philippines. Political uncertainty further amplifies economic risks. The impeachment case of Vice President Sara Duterte is proceeding in the Senate, and the change in Senate leadership (with Duterte ally Allen Cayetano replacing Senate President) has significantly weakened the institutional basis for conviction. MUFG Bank warns that the escalation of conflict between the Marcos and Duterte political families could "weaken investor confidence" and create a more unfavorable environment for the economy already under pressure from stagflation. MUFG predicts in its baseline scenario that if the situation in the Middle East calms down in May, the BSP will selectively tighten policy; but if Brent oil prices remain high in the third quarter, policy tightening in the entire region will be more widespread, with the Philippines and India at the forefront of austerity. India: Modi plays the "restriction on gold" and "patriotism" combo Unlike Indonesia and the Philippines focusing on monetary and fiscal policy response, India has chosen a more administrative and trade protectionist defense line, which in itself is a measure of the severity of the crisis. Over the past month, the Indian government has swiftly implemented a series of emergency measures: on May 13, it significantly raised import duties on gold and silver from 6% to 15%; a few days later, it changed the status of silver bar imports from "free import" to "restricted import"; it is considering raising import duties on edible oils. But the most notable move was Prime Minister Modi's rare "patriotism mobilization" he openly called on the nation to "temporarily refrain from buying gold, reduce outbound tourism, use public transport more often, and practice remote work to save fuel". Brickwork Ratings estimates that Modi's seven-call-to-action (including working from home, avoiding international travel, suspending gold purchases, saving fuel, reducing edible oil consumption, promoting organic farming, and promoting domestic goods) could release up to $37.8 billion in foreign exchange reserves for India in this fiscal year. The background for these measures is equally severe. As of May 18, the Indian rupee hit a historic low of 96.18 against the US dollar, depreciating by over 5.5% since the conflict with Iran began, making it one of the worst-performing currencies in Asia. Foreign exchange reserves have decreased from a peak of $728.49 billion before the conflict (February 27) to about $690.7 billion, a cumulative reduction of about $38 billion. The Reserve Bank of India's "net short position in USD" in the onshore and offshore markets is approaching $100 billion, setting historical records for intervention. ANZ Bank predicts that India's current account deficit could reach 1.9% of GDP in 2026. However, analysts generally believe that these measures are more short-term emergency measures than fundamental solutions to the systemic pressures brought about by external factors. Indian media points out that the exchange rate is fundamentally determined by foreign exchange supply and demand, and administrative measures are unlikely to reverse market pricing in the long term; if depreciation stems from a long-term imbalance in the current account, the effect of intervention will be very limited. At the same time, the significant rise in gold import duties to 15% has widened the price difference between domestic and foreign gold, stimulating rapid activity in the grey market of gold smuggling, which may become a thorny challenge for India's next regulatory steps. Economists also warn that similar trade protectionist measures may spread to other Southeast Asian economies, especially when food prices further skyrocket. Historical echoes: Is the ghost of 1997 returning? The pressures on Asian currencies, soaring energy prices leading to emergency measures, and central banks depleting foreign exchange reserves - these phenomena make it difficult to ignore a historical comparison: is the 1997 Asian Financial Crisis repeating itself? Analysts acknowledge that the similarities between the two cannot be ignored. During the crisis in 1997, currencies of countries like Thailand, Indonesia, and South Korea plummeted, foreign exchange reserves evaporated within a few months, turmoil led to severe economic recession, skyrocketing inflation, and political unrest. In 2013, the Federal Reserve signaled a reduction in stimulus, triggering the "taper tantrum", with massive capital outflows from emerging markets, and India, Indonesia, and the Philippines being the first to bear the brunt. However, most economists believe that the institutional defenses built by Asian economies over the past thirty years make today's vulnerabilities fundamentally different from those of 1997. David Lubin, Senior Fellow at the Chatham Institute, points out that the crisis in 1997 was driven by a "toxic combination of fixed exchange rates, high short-term external debt, low foreign exchange reserves, and high current account deficits", while "today, Asian economies precisely because of the lessons learned from the late 1990s crisis are better protected". Brad Setser, Senior Fellow at the Council on Foreign Relations, provides a key distinction based on the nature of the impact: the 1997 crisis was an impact on the financial account a drying up of bank funds flowing in; whereas the current crisis is an impact on the current account the flow of oil being cut off. "One is a financial shock, the other is a real shock. For the most affected Asian economies, the impact of the 97/98 crisis was much greater." Today, Asian economies generally have more flexible exchange rate systems, more robust foreign exchange reserves, deeper local currency bond markets, and significantly reduced dependence on short-term external debt, all of which differentiate them from the vulnerabilities of 1997. But this does not mean that there is room for complacency. Sanjeev Matul, Chief Economist for Southeast Asia and India at ANZ Bank, issued a severe warning in his report last week "Given the substantial reduction in foreign exchange reserves and the continued headwinds of high energy prices, such a scale of forex intervention will become increasingly difficult to sustain". Rob Subarman, Chief Economist of Nomura Holdings, also warned that when global financing conditions tighten, risk premiums may rise sharply in a short period of time, and even seemingly ample foreign exchange reserves may be quickly depleted, while rising living costs may further exacerbate social and political risks. In conclusion The three most vulnerable emerging markets in Asia Indonesia, the Philippines, and India are simultaneously facing the combined pressures of energy, bond markets, currencies, and politics in a "perfect storm". Each country's firewall thickness is different: India has nearly $690 billion in foreign exchange reserves and about 9 months of import cover, a relatively safe level of reserves; the Bank of Indonesia is using a combination of "distortion operations" and forex intervention to respond, and is likely to hike rates today; the Philippines has the narrowest fiscal space, squeezed by both inflation and growth, with stagflation risk most prominent. However, the common dilemma lies in the fact that when the conflict continues to drive up oil prices, when US bond yields remain high, and when current account deficits erode reserves and exchange rates, any country's unilateral defenses may be breached in the flood of global capital reversal. If oil prices continue to stay above $100 per barrel and US bond yields remain at 5% or higher, the policy space for these three economies will be further constrained, and social and political risks will also accelerate under the pressure of rising living costs. Neumann of HSBC says, "We are not out of the woods yet." and Tuvey of Capital Economics puts it more bluntly: even if rate hikes are implemented, they can only provide a "short-lived reprieve". In this storm, no country can stand alone in the dual stranglehold of energy crisis and global capital contraction. Asian emerging markets are undergoing the most severe comprehensive stress test in the past three decades, since 1997 and 2013.