Economic strains in emerging markets increase two months after the Iran War

The charts below, two months after the Iran War began, show the impact of the war on the economy in emerging and developing countries. They are facing increasing inflation, fiscal strains, and trade disruptions.

1/DIRECT HITS

Middle East countries and their neighbors are the most directly affected.

Qatar recorded its first-ever?trade deficit of $1.2 billion after the Strait?of?Hormuz closure slashed imports by half and exports more than 90%. JPMorgan's economists predict that Qatar's economy will shrink by 9% in this year due to damage caused to an LNG facility, which is more than Iran's forecast of minus 6.1%.

The Fund cut its growth projections for the emerging and developing economies group from 4,2% to 3,9%. This month's IMF-World Bank meetings, held in Washington, included stark warnings.

The event heard Qatar Finance Minister Ali Ahmed Al-Kuwari say that "a full-fledged effect is on its way and is not too far away."

The emerging Asian markets are especially vulnerable, as over 50% of crude oil imports and over a third of gas imports pass through the Strait of Hormuz.

The higher prices of crude oil have benefitted producers further away. Brazil and Kazakhstan have seen their currencies strengthen by more than 9% in the past year. Emerging market stocks are also at record highs.

2/ TRUNNING TANKERS

Energy costs have risen, and inflationary pressures are increasing. This has reduced the room for central banks to reduce interest rates. Instead they've started pushing them in a different direction.

Last week, the Philippines raised rates, and Turkey, Poland Hungary, the Czech Republic and South Africa are now more hawkish, due to the threat of a'second round effect', where wages and costs will rise.

JPMorgan?says that markets in the majority of the 15 emerging economies they track are pricing in a tighter monetary policies over the next 6 months. Economists predict it too.

Zahabia Gupta, a senior analyst at S&P Global, said that rising inflationary pressures and a risk-off attitude could tighten the financing conditions. This would push (bond) yields higher.

3/ SUBSTANCE STRAINS

The governments of emerging markets already spend hundreds billions of dollars per year to cushion households from high energy costs. And the recent spikes will only increase that number.

IMF estimates global fossil fuel subsidies will amount to $725 billion by 2024, or 6% of the global GDP. This is down from 12 percent in 2022 when Russia's invasion of Ukraine caused a spike in energy prices.

The calculations don't separate emerging markets but the Fund claims that three-quarters of all subsidies are distributed in the Middle East, North Africa and Central Asia.

Citi's Joanna Chua wrote in a client note that "we see growing fiscal risk in EM if this energy?shock is more persistent." She pointed out Egypt, Turkey Indonesia, India, Hungary, and Poland as being particularly vulnerable.

The Fragile Few

Analysts fear that Egypt, Sri Lanka, and Pakistan are among a group of lower-income, crisis-scarred countries, which they say is being pulled back into trouble.

Fuel and food prices are rising in Egypt. Tourism revenues, which brought in nearly $20 billion last fiscal year, could also drop.

The cost of paying back Egypt's debt has also risen, with almost $30 billion in payments due.

Sri Lanka has agreed to a temporary reduction in its IMF funding and reinstated fuel subsidies. This is to give the country some breathing room.

Pakistan's FX reserves were $16.4 billion at the end of March, which is less than three month's worth of imports. Analysts warn that these are negative figures when you factor in the central bank’s foreign currency liabilities.

Another blow for Africa

The IMF graph below shows that many of Sub-Saharan Africa's poorer countries are particularly affected by the current economic situation.

Bottom-left quadrant: a dependency on imported oil and strained government finances. The longer crude prices remain high, the greater the fiscal pressures.

The head of the IMF Kristalina Gheorgieva stated at an event held in London, last week that "we have a negative shock to supply". She stressed "the worst thing is to try to balloon demand" as some countries do by offering subsidies to the entire population, instead of just those who are most in need.

She believes that the Fund may need to provide an additional $20 to $50 billion in emergency assistance due to the crisis.

(source: Reuters)