Iran conflict may heighten economic risks for emerging markets: Fitch

Escalating tensions involving Iran could create additional economic and financial challenges for emerging market sovereigns, particularly through higher energy costs, exchange rate pressures and disruptions to remittances, according to a report by Fitch Ratings on Monday. 

In a report titled “Iran conflict raises new credit risks for emerging market sovereigns,” the ratings agency warned that prolonged disruption to global energy supplies from the Gulf region could significantly weaken investor sentiment and tighten financing conditions for emerging economies. 

On February 28, the United States and Israel carried out military strikes on Iran, prompting retaliatory attacks by Tehran on US positions in the region as well as Israeli targets, raising fears of wider geopolitical and economic repercussions. 

Fitch said that sustained disruption to energy flows from the Gulf beyond its baseline assumptions could strengthen the US dollar and dampen appetite for emerging market debt. 

“We expect this would result in a stronger US dollar and weaken the market for debt issuance, particularly for highly speculative-grade issuers. Higher energy prices could put upward pressure on inflation, affecting monetary policy decisions globally,” the report said. 

Energy imports key transmission channel 

According to Fitch, oil and gas imports are the most direct channel through which the conflict could affect emerging markets, given the potential impact on global energy prices. For larger economies such as India, net fossil fuel imports account for 3% or more of GDP, making them particularly sensitive to spikes in energy costs. 

“The Iran conflict could raise additional challenges for some emerging market sovereigns through channels such as energy imports, remittances, fiscal subsidies, exchange rates and access to international finance,” the agency said. 

Disruption in Strait of Hormuz poses a major risk 

The report noted that the impact on sovereign credit profiles would likely remain contained if a potential disruption to the Strait of Hormuz, a key global oil shipping route, lasts for less than a month and if significant damage to the region’s oil production infrastructure is avoided. 

However, a longer disruption could have more severe consequences. 

A prolonged closure or sustained supply disruption could significantly raise import costs for energy-dependent economies, particularly those with limited financing capacity or large current account deficits. 

Countries such as Pakistan, which already face external financing pressures, could be especially vulnerable to higher import bills. 

Fitch also warned that persistently high energy prices could intensify fiscal pressures on governments that maintain fuel subsidy regimes to shield consumers from price shocks.  

“Prolonged higher energy prices would also increase fiscal strains for governments that have subsidy regimes designed to shield consumers, or that launch similar measures in response to higher energy prices,” the report said. In addition, emerging markets could face further external pressure if the conflict disrupts remittance flows or triggers broader financial market volatility.