Oil shock could strain emerging markets beyond inflation, analysts say

Core Viewpoint - The ongoing conflict in Iran is expected to significantly impact emerging markets, leading to broader economic pressures beyond just inflation, particularly affecting external balances, currencies, and capital flows [1] Group 1: Impact on Oil Prices - Analysts from J.P. Morgan and Bernstein predict that Brent crude prices could exceed $100 per barrel if the conflict persists, as Iran threatens to close the Strait of Hormuz [1] - Brent crude futures increased by $5.63, or 7.2%, reaching $83.36 per barrel, with a peak of $85.12, the highest since July 2024 [1] Group 2: Economic Consequences for Emerging Markets - A 10% rise in oil prices could worsen current account balances for emerging markets by 40-60 basis points, with prolonged increases deepening these deficits [1] - Countries such as Thailand, South Korea, Vietnam, Taiwan, and the Philippines are identified as the most exposed to these economic pressures [1] Group 3: Inflation and Growth Projections - Goldman Sachs estimates that a rise in Brent crude from $70 to $85 could increase inflation in emerging Asia by approximately 0.7 percentage points and reduce economic growth by about 0.5 points [1] - Current account deficits are expected to widen across nearly all economies in the region, particularly affecting Thailand, Singapore, and South Korea [1] Group 4: Risks to Currency and Capital Flows - Citigroup warns that a prolonged oil shock could destabilize inflation expectations in emerging markets, with countries like Argentina, Sri Lanka, Pakistan, and Turkey facing increased risks of capital outflows and currency depreciation [1] - J.P. Morgan has adjusted its foreign exchange outlook for EMEA emerging markets to "marketweight" and has placed Poland's zloty on an "underweight" list [1]