Yves here. Many pieces of mainstream news have explained that Asian countries, especially India and the Philippines, are in a world of hurt because of the Iran war that caused the energy and food crises that will come soon. Satyajit Das provides data on the exposure of major players, as well as policy options when things go in the same direction as the pair. Needless to say, there are no big ones.
By Satyajit Das, former banker and author of many derivative technical works and several mainstream titles: Traders, Guns & Money: Knowns and Unknowns in the Wonderful World of Derivatives (2006 and 2010), Extreme Money: Masters of the Universe and the Cult of Risk (201 – 16 and 20116) and Aqued Aqued (2011) 2021). His latest book on ecotourism – Wild Quests: Journeys into Ecotourism and the Future for Animals (2024). This is an extended version of a clip that appeared on print version of the New Indian Express on the 29thth in May 2026.
A reliable supply of cheap energy, as the war in Iran highlights, is essential to modern economies and societies, at least for the foreseeable future. The shock divides the world into oil and non-oil regions. Along with high electricity prices, the shortage of petrochemicals will affect agriculture, mining, plastics, textiles, semi-conductors and construction. Given that even if the conflict were to end with a lasting agreement it would take months or years to restore normalcy, the consequences are likely to be dire.
Europe, already affected by its decision to cut off Russian gas, and Japan, are affected. But the bigger effects will be felt across oil-poor South and East Asia.
The extent of the damage depends on pre-existing vulnerabilities, including insufficient reserves, poor public finances, trade imbalances, high levels of debt, especially foreign currency borrowing, dependence on overseas capital, small industrial bases, and poor emergency plans. The table below sets out the most important statistics:
Notes: all prices are for 2025
For foreign energy consumers, supply disruptions work in several ways. The cost of imports is rising into the economy. Its immediate manifestation is an expanding account deficit.
Given the rampant impact of transportation costs, prices rise exponentially. Rising input costs for businesses affect profitability and, ultimately, performance. As essential goods become more expensive, a fall in income reduces consumption which slows down the economy with the result of unemployment. Tax revenues are falling and social spending is kicking in the government budget. This is often exacerbated by vote-buying subsidies, often through fuel costs, and cash transfers to reduce the cost of living pressures.
Financially, the most obvious signs are currency depreciation and falling asset prices. Asian currencies are down 5 to 6% since the start of the Iran war. Asian stock markets, at least those without exposure to semi-conductor stocks such as South Korea and Taiwan, fell. The volatility of stock markets is very high.
The source:
In general, foreign investment is slow. Portfolio investors in stocks and bonds exit as asset values translated into their underlying currency decline. A decline in direct investment indicates poorer prospects. Banks are facing high non-performing loans from a weak economy and low demand for loans. When relying on foreign loans to supplement domestic deposits, the availability of funding is affected.
Inflation puts pressure on interest rates which slows down the economy and increases economic and financial pressures. The current issue is the literature on how oil shocks work in the economy. Other factors, including Trump’s now reckless tariffs and economic warfare in the form of trade embargoes and sanctions, will exacerbate the problem. The risk of economic and financial crisis in many affected countries is now high.
What should be done? Like an Irish farmer’s guide to a traveler: “I wouldn’t start here!”
The classic policy directive is to let the currency depreciate and force the necessary correction. Some intervene in the currency markets and at the same time use high short-term interest rates to support the exchange rate. The most extreme step is for governments to impose restrictions on money transfers and, as an option, implement price and income controls. Each has advantages and disadvantages.
A devaluation should, in theory, have the effect of reducing imports by compressing purchases considering the application of the normal laws of supply and demand. It should simultaneously increase exports. It forces the necessary adjustment of living standards, often brutally especially for vulnerable low-income groups.
In fact, its effectiveness depends on several factors, especially the elasticity of demand for imports and exports. If imports are important, such as energy, and non-substitutable or non-transferable costs, imports may decrease. Export volume development depends on the type of product and the sensitivity of demand to prices. It also depends on the competition and the catch. If competitors have superior products or are willing to match prices, then volumes may not respond. This is especially problematic when all emerging markets are affected and all countries want to devalue at the same time, which reduces the ability of one country to devalue its currency. An additional problem is the global economic slowdown in all developed countries, such as the US and Europe, which will reduce the demand for exports that are the backbone of Asian economies.
Depreciation also reinforces inflation through higher import costs, unless it destroys demand which can lead to a sharp drop in growth. A weak currency may accelerate a major flight as investors fear losses. It creates disadvantageous treatment by importers who speed up purchases and exporters who slow down the conversion of foreign exchange inflows. Borrowers of foreign currency without the same income that provide a natural hedge face increasing debts. Enterprises in emerging markets often use lower interest rates, compared to domestic financing, which use currency risk.
Intervening in currency markets rarely works. It risks using the reserves needed to cover imports or short-term debt. Historically, success has required cooperation between central banks as was the case with the 1985 Plaza Accord that devalued the dollar. Major emerging market banks have a bad track record. In the Asian stock market crisis of 1997, Thailand, Indonesia and Malaysia largely liquidated their foreign exchange reserves in an unsuccessful attempt to protect their currencies, which were pegged to the dollar. In general, when foreign currency liabilities and investments exceed reserves, such interventions are rarely successful.
In order to limit the depreciation of the currency, the central banks of India, Indonesia and the Philippines, have repeatedly intervened in the currency markets to reduce foreign exchange rates but with limited success.
Currency control will require controlling the exchange rate and restricting the inflow and outflow of foreign currency. They can manage the crisis to maintain economic sovereignty over exchange rates, interest rates, inflation and the banking system. In the long run, capital controls will deter foreign investment because investors fear losing the freedom to repatriate. It often leads to the black money market and solutions that emphasize their efficiency.
In a market-based system, it is difficult to isolate the economy from external events, especially the magnitude of the Iran war. Poorly developed domestic capital markets, which limit the local supply of capital and risk management tools, hamper the ability to absorb shocks.
Many emerging market economies are also woefully unprepared. Assuming no disruption to the supply chain, they have woefully low stocks or reserves. Their economy remains less organized with less diversification of their industrial bases. Despite the history of energy dependence and past disruptions, there have been limited efforts to increase energy independence through conservation measures or seeking alternative sources. Investment in renewables, such as solar, wind, water and biofuels, remains insufficient. Even emergency plans to rapidly ramp up other fossil fuels, such as coal, are lacking. In contrast, China’s forward planning is focused on the development of large strategic oil reserves and the supply of renewable energy, which now accounts for 40% of all electricity generated and more than 50% of all installed capacity.
Governments have encouraged paranoid thinking among citizens, encouraging them to believe that policymakers can protect themselves from these events. Subsidies, transfers and price controls are popular in elections, but they do not solve the main problems.
Like Aesop’s grasshopper, energy-starved countries wasted a summer of supplies and now find themselves facing a harsh winter.
Satyajit Das June 2026
© 2026 Satyajit Das All Rights Reserved
