The Economic Shock Spreads Beyond The Region
Two months after the outbreak of the Iran war, the economic impact is spreading well beyond the Middle East. Emerging and developing markets are facing higher inflation, tighter fiscal conditions and growing disruptions to trade, with energy prices acting as the main transmission channel.
The closure of the Strait of Hormuz has intensified the pressure. As a major route for global energy shipments, the disruption has hit nearby economies directly while forcing more distant importers to reassess inflation, growth and policy risks. For investors, the conflict is no longer only a geopolitical event. It is becoming a broader macroeconomic test for vulnerable economies.
Middle East Economies Take The Direct Hit
Countries in and near the Middle East are absorbing the most immediate damage. Qatar posted its first ever trade deficit in March, at 1.2 billion dollars, after the closure of the Strait of Hormuz cut exports by more than 90% and reduced imports by half.
JPMorgan economists now expect Qatar’s economy to shrink 9% this year following damage to an LNG plant. That would be deeper than the IMF’s forecast of a 6.1% contraction for Iran. The IMF has also lowered its growth projection for emerging and developing economies as a group to 3.9% from 4.2%, while officials at IMF and World Bank meetings in Washington warned that the broader impact is still building.
Asia Faces Energy Import Vulnerability
Emerging Asian markets are especially exposed because more than 50% of their crude imports and more than a third of their gas imports have traditionally moved through the Strait of Hormuz. That dependence makes the region vulnerable to shipping disruption, higher energy costs and renewed inflation pressure.
The shock is not uniform. Some commodity producers farther from the conflict have benefited from higher crude prices. Brazil and Kazakhstan have seen their currencies strengthen by more than 9% year to date, while emerging market stocks have recovered to record highs. Tech heavy markets such as South Korea and Taiwan have added further support to that rebound.
Central Banks Lose Room To Cut Rates
The rise in energy costs has reduced the ability of central banks to ease monetary policy. Higher fuel prices can feed into broader inflation, and policymakers are now watching for second round effects, where wages and other costs begin to rise in response to the initial shock.
The Philippines raised interest rates last week, while Turkey, Poland, Hungary, the Czech Republic, India and South Africa have shifted toward a more hawkish stance. JPMorgan says markets in most of the 15 major emerging economies it tracks are pricing in tighter monetary policy over the next six months. For bond investors, that points to the risk of higher yields and tougher financing conditions.
Subsidies Add Pressure To Public Finances
Emerging market governments already spend heavily to shield households from high energy prices, and the latest surge is likely to increase that burden. The IMF estimates global fossil fuel subsidies reached 725 billion dollars in 2024, equal to 6% of global GDP.
Although that figure is lower than the 2022 level, when Russia’s full scale invasion of Ukraine pushed energy costs sharply higher, the pressure remains concentrated in sensitive regions. The IMF says the Middle East, North Africa, Europe and Central Asia account for three quarters of global subsidies. Citi has warned of growing fiscal risks in emerging markets from price caps, tax cuts and subsidies if the energy shock persists, with Egypt, Turkey, Indonesia, India, Hungary and Poland among the vulnerable countries.
Fragile Economies Face Renewed Stress
Egypt, Sri Lanka and Pakistan are among the lower income economies that analysts fear could be pulled back toward crisis. Egypt faces rising fuel and food costs, while tourism revenue and remittances from workers in the Gulf could come under pressure. A 9% fall in the Egyptian pound this year has also increased the cost of servicing debt, with nearly 30 billion dollars in payments due.
Sri Lanka, which defaulted in 2022, has reintroduced fuel subsidies and negotiated temporary easing on its IMF financing. Pakistan’s gross foreign exchange reserves stood at 16.4 billion dollars at the end of March, covering less than three months of basic imports. Analysts warn the position may be weaker if the central bank’s foreign currency liabilities are included.
Africa Faces Another External Blow
Many poorer countries in Sub Saharan Africa are also under pressure. The most exposed are those that rely heavily on imported oil while already facing stretched government finances. The longer crude prices remain high, the more these fiscal strains are likely to deepen.
IMF Managing Director Kristalina Georgieva described the situation as a negative supply shock and warned against broad stimulus measures that inflate demand. She argued that support should be targeted to those who need it most rather than distributed through population wide subsidies. The IMF expects it may need to provide between 20 billion and 50 billion dollars in additional emergency support as the crisis develops.
