Oil shock could strain emerging markets beyond inflation, analysts say

The war in Iran and the ​resulting surge in energy prices will ​impact emerging markets well beyond inflation to broader pressures on external ​balances, currencies and capital flows, analysts warn.

Brokerages, including J.P.Morgan and Bernstein, expect Brent prices to rise above the $100 mark if the conflict continues as Tehran has vowed to close the Strait of Hormuz ‌and said it ⁠would fire ⁠on any ship trying to pass the crucial shipping route for oil and gas.

Brent crude futures ​were up $5.63, or 7.2%, at $83.36 a barrel by 1254 GMT after touching their highest since July ​2024 at $85.12.


"A mere 10% rise in oil prices can deteriorate current account balances (for emerging markets) by 40-60 basis points. Prolonged increases would only deepen these deficits," analysts at ING ​said in a note, adding that Thailand, South ⁠Korea, Vietnam, Taiwan ‌and Philippines are the most exposed.

The U.S. and Israeli air ​war against ​Iran widened, with Israel attacking Lebanon and Iran responding with strikes against ⁠energy infrastructure in Gulf countries and against tankers in the ​Strait of Hormuz.

Global financial markets have been rattled by ​the conflict, with both the emerging market equities and currency indexes falling to three-week lows as investors sought the safety of the U.S. dollar.

Higher crude prices pose only a limited risk to China unless the shock is prolonged or escalates sharply, but India, with its thin oil reserves, would be among the most exposed to ‌a sustained supply disruption, analysts said.

Goldman Sachs estimates that a supply driven jump in Brent crude from $70 to $85 would add roughly 0.7 percentage ​points to inflation across ​emerging Asia and ⁠knock about 0.5 points off economic growth, while widening current account deficits across almost every economy in the region, particularly Thailand, Singapore and South Korea.

Citigroup warned that a prolonged oil ​shock could "aggressively de-anchor" inflation expectations across emerging markets, with low-reserve countries such as Argentina, Sri Lanka, Pakistan and Turkey facing heightened risks of capital outflows and currency slides.

Separately, J.P. Morgan's analysts moved EMEA emerging market foreign exchange to "marketweight" on Tuesday and added Poland's zloty to their list of "underweight" currencies.