- Less than 2 months’ disruption of the Strait of Hormuz could push average EM inflation higher by +0.8-1.0p with limited recessionary effects – apart from GCC countries. We estimate that the closure of the Strait of Hormuz up to six weeks would result in a -1.6pps decrease in GDP for Saudi Arabia and -3.3pps for the UAE. Tourism – a key pillar of diversification across the Gulf – would also be hit in the short term, with knock-on effects on FDI and mega-project timelines including AI.
- From price shock to supply shock? As the conflict drags on, Asian economies could face supply disruptions on top of stronger inflationary shocks, given that 56% of their oil imports and 30% of their total gas imports originate from the Middle East. In Asia, Taiwan, Vietnam, Thailand, Pakistan, Bangladesh and Sri Lanka are more exposed to a supply shortage while in Africa, Egypt, Ethiopia, Kenya and Tunisia would suffer the most from a global oil supply shortage, given their exposure to Middle Eastern hydrocarbons. A temporary shortfall could be partially mitigated through adjustments in the energy mix (i.e. coal and renewables to a lesser extent), but energy supply disruptions for an extended period would require demand rationalization of -5 to -7% in the final energy consumption should prices double.
- Beyond three months of closure for the Strait of Hormuz, many more EM countries are at high recession risk as they run triple deficits (fiscal, current account, energy). GDP growth impact would average at least -0.5pp to 3.1% for emerging markets excluding China. Bangladesh, Egypt, Ethiopia, Jordan, Kenya, Morocco, Pakistan, Poland, Romania, Sri Lanka and Tunisia would be most at risk. Meanwhile, a second group of economies sits in moderately high risk as they have more room to maneuver to support their economies: Chile, China, Hungary, India, the Philippines, Taiwan, Thailand and Türkiye. By contrast, large commodity exporters such as Brazil and Mexico appear structurally resilient despite fiscal deficits as energy exports cushion the impact of higher prices.
- The shock came at a supportive moment for EM carry. It calls for selectivity along a targeted energy risk premium. Early market repricing has begun: FX markets reacted quickly, with the Egyptian pound experiencing the largest depreciation (-9.2%), followed by the Hungarian forint (-8%) and the Chilean peso (-4.9%). Repricing in local bond markets reveals a highly differentiated picture. In Mexico, the rise in nominal yields is largely explained by higher inflation expectations, while in Central and Eastern Europe – where the sell-off has been strongest – markets are pricing a larger share of risk and liquidity premia. The shock also complicates the policy outlook: With energy-driven inflation risks rising, many EM central banks are likely to remain on hold for longer despite slowing growth. A prolonged conflict could see inflation expectations repricing more forcefully across EM curves, steepening local yield curves and delaying monetary easing cycles. Overall, the adjustment is likely to remain selective rather than systemic. The most likely outcome is therefore the emergence of a targeted energy risk premium across vulnerable EM economies rather than a broad-based sell-off across the asset class.