Higher energy prices, pressure on fiscal subsidies, and exchange rate volatility could impact several emerging economies if tensions disrupt oil supplies.
The ongoing Iran conflict could pose new credit risks for several emerging market economies, including India, due to their exposure to rising energy costs, remittances, fiscal pressures, and currency volatility, according to a report by Fitch Ratings.
The global ratings agency said that oil and gas imports remain the most direct channel through which the conflict could impact emerging markets, primarily by pushing up global energy prices.
Fitch noted that many emerging economies rely heavily on fossil fuel imports. Among larger economies, net fossil fuel imports account for around 3 percent or more of GDP in countries such as Chile, Egypt, India, Morocco, Pakistan, the Philippines, Thailand, and Ukraine.
“If any effective closure of the Strait of Hormuz lasts less than a month and major damage to the region’s oil production infrastructure is avoided, risks to emerging market ratings should remain contained,” Fitch said in a statement on Monday.
However, the agency cautioned that a longer disruption to shipping through the Strait of Hormuz or sustained damage to oil infrastructure in the Gulf could significantly worsen the outlook for emerging markets.
Higher energy prices could also strain government finances in countries that maintain fuel subsidy regimes designed to shield consumers from rising costs. Governments may be forced to expand subsidies if global oil prices remain elevated for a prolonged period.
Countries with already stretched financing conditions or large current account deficits, such as Pakistan, could face particularly acute vulnerabilities from higher import bills.
Beyond oil and gas, the conflict could also disrupt other commodity markets. Fitch pointed out that the Gulf region plays an important role in global aluminium production and also supplies key inputs for the fertiliser industry, which could have broader implications for global food production and inflation if disruptions persist.
The agency added that a prolonged disruption to global energy supplies from the Gulf could also weaken global investor sentiment, increasing financial market volatility and tightening access to international financing for emerging markets.
Hydrocarbon-exporting economies, however, could see some positive economic effects due to higher energy prices during the conflict.
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