Several of Asia's most vulnerable economies are currently facing mounting pressure. Despite the deepening economic blow from the oil shock triggered by the Iran conflict, central banks in these countries are still under pressure to tighten policy. As tensions in the Middle East deal a dual blow to consumers and businesses, Indonesia, the Philippines, and India are already mired in capital outflows and currency plunges. The turmoil in global bond markets over the past week has brought them even greater pressure. The sharp surge in US Treasury yields has pushed up the US dollar exchange rate, reducing the attractiveness of emerging market assets and thereby exacerbating capital outflows from Asia. This increases the burden of servicing US dollar-denominated debt and forces central banks to raise interest rates to defend their currencies and enhance the appeal of local debt, even as domestic economic growth is bound to slow—a difficult predicament for many Asian policymakers. Frederic Neumann, Chief Asia Economist at HSBC Holdings Plc, stated, "Economic growth across much of the region will face greater pressure, putting central banks in a painful dilemma over whether and how to respond to soaring inflation pressures. The situation could become more severe. We are not out of the woods yet." Market data shows that high oil prices and inflation concerns have pushed global government bond yields to multi-year highs. The yield on the 30-year US Treasury note climbed on Tuesday to its highest level since 2007. The surge in US Treasury yields has intensified pressure across emerging markets in Asia. Except for the Chinese yuan, all major Asian currencies have depreciated since the Iran conflict—with the Philippine peso, Indian rupee, and Indonesian rupiah performing particularly weakly. Are emergency rate hikes still just a temporary fix? After rounds of intensive "verbal intervention" and "direct intervention" to defend the Indonesian rupiah, which had fallen to historic lows, the market widely expects Bank Indonesia to resort to a rate hike this Wednesday. "However, even this would only bring a brief respite," said Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics. "For the currency to stabilize, authorities must ultimately abandon previous populist and interventionist policies." Indonesian Finance Minister Purbaya Yudhi Sadewa said on Tuesday that the government is stabilizing yields and curbing capital outflows by repurchasing government bonds. Bank Indonesia has previously attracted more capital inflows to support the exchange rate by buying long-term bonds and selling short-term bills. This is similar to the "Operation Twist" introduced in 2022—when the central bank sought to ease the sharp rise in borrowing costs after the COVID-19 pandemic. (Chart: USD/IDR exchange rate vs. Indonesia's foreign exchange reserves) In the Philippines, traders and economists are increasingly discussing whether the central bank might implement a significant or off-cycle rate hike if pressure on the peso intensifies further. To block a destructive surge in yields, the Philippine government even took the rare step of rejecting all market bids at a bond auction on Tuesday. In contrast, India's current defensive measures carry a strong protectionist tone: intervening in the foreign exchange market while erecting high barriers against commodities, with gold and silver imports facing unprecedentedly strict controls. Economists worry that if international food prices also spiral out of control, such defensive trade barriers could quickly spread across Southeast Asia. A team of economists led by Samiran Chakraborty at Citigroup said India's future policy options might include stricter capital controls—such as limiting residents' overseas direct investment and tighter regulations requiring exporters to repatriate foreign exchange earnings. Chakraborty stated that the likelihood of such measures being introduced within the next month is "high," adding that although India's foreign exchange reserves are currently at a "reasonable" level, the situation is "gradually deteriorating." The situation could deteriorate rapidly For emerging markets in Asia, the true horror lies in the fact that the "ghost" of history may never be far away—history has repeatedly shown that once global financial conditions tighten abruptly, a collapse in market confidence can occur in an instant. During the 1997-1998 Asian financial crisis, countries including Thailand, Indonesia, and South Korea saw international investor confidence evaporate instantly after their weaknesses—"inability to cover massive current account deficits" and "inability to defend the exchange rate"—were exposed. Within just a few months, their currencies were decimated, foreign exchange reserves vanished overnight, ultimately triggering prolonged economic recessions, hyperinflation, and disastrous political turmoil. Similarly, the "Taper Tantrum" triggered by the Federal Reserve signaling a reduction in quantitative easing in 2013 also caused a massive capital flight from emerging markets due to surging US Treasury yields. In that storm, India, Indonesia, and the Philippines were the most severely affected "fragile three." This time, history seems poised to repeat itself. Although central banks across Asia have built defenses in advance and increased foreign exchange intervention, their currency defenses are teetering in the face of massive pressure. Sanjay Mathur, Chief Economist for Southeast Asia and India at ANZ Group, wrote in a report last week: "Given that foreign exchange reserves have been significantly depleted and downward pressure from energy prices has not subsided, foreign exchange intervention on this scale will become increasingly difficult to sustain." ANZ economists forecast that India and Indonesia's current account deficits will account for 1.9% and 1.1% of GDP, respectively, by 2026, while the Philippines' deficit will be as high as 4%. The Philippines is one of the countries hardest hit by energy shortages globally and is also under pressure from political instability. The oil price shock has dragged the Philippines' GDP growth to its lowest level since 2009 (excluding the pandemic period). Inflation has also exceeded 7%, far above the central bank's 2%-4% target range. In Indonesia, the current government's expansionary fiscal plans—including its flagship free meal program—have unsettled investors already concerned about the country's debt trajectory and sovereign rating outlook. While India's Modi government has a more stable political foundation, it also faces multiple pressures: amid oil prices potentially exacerbating the fiscal deficit and pushing up inflation, it still needs to maintain infrastructure spending and welfare support. Rob Subbaraman, Chief Economist at Nomura Holdings, stated, "The lessons from the 'Taper Tantrum' and the Asian financial crisis are that risk premiums can rise sharply, and seemingly ample foreign exchange reserves can be depleted rapidly. As the public blames the government for rising living costs, increasing cost-of-living pressures could lead to growing local instability."