Increasing Economic Pressures in Emerging Markets Two Months after the War with Iran

SadaNews - Two months after the outbreak of war with Iran, the scope of economic losses is widening beyond the Middle East, as emerging and developing markets face rising inflation rates, increasing financial pressures, and trade disruptions.

Some countries in the Middle East and its neighboring nations are experiencing the most direct economic impacts.

Technology giants are preparing for the largest wave of IPOs in history despite a lack of profits.

Qatar recorded its first-ever trade deficit, amounting to $1.2 billion in March, after the closure of the Strait of Hormuz reduced exports by more than 90% and imports by half.

Financial markets are fluctuating as traders assess the stalled negotiations between the United States and Iran.

Experts at JP Morgan expect the Qatari economy to contract by 9% this year following damage to a liquefied natural gas facility, surpassing the International Monetary Fund's prediction of a 6.1% contraction for Iran.

The Fund has lowered growth forecasts for emerging and developing economies combined from 4.2% to 3.9%, with this month’s meetings of the IMF and World Bank in Washington including stern warnings.

Qatari Finance Minister Ali Ahmed Al-Kuwari stated on the sidelines of the meetings: "The full impact is coming, and it is not far away."

Emerging Asian markets are particularly at risk, as over 50% of crude oil imports and more than a third of gas imports usually pass through the Strait of Hormuz.

Nevertheless, producers from distant locations have benefited from the rise in crude oil prices, as the currencies of Brazil and Kazakhstan surged by more than 9% since the beginning of the year, and emerging market stocks rebounded to record levels, with technology-dominated markets like South Korea and Taiwan contributing to this rise.

Changing Shipping Routes

The increase in energy costs, along with accompanying inflationary pressures, has constrained the maneuvering room available to central banks to lower interest rates, pushing them to raise borrowing costs instead.

The Philippines raised interest rates last week, while Turkey, Poland, Hungary, the Czech Republic, India, and South Africa have begun to adopt a more hawkish stance due to the risks of "second-round effects" when wages and other indirect major costs rise.

JP Morgan states that the markets in most of the fifteen major emerging economies it tracks expect a tighter monetary policy over the next six months, a prediction shared by economists.

Zahebia Gupta from S&P Global noted in a memo: "Rising inflationary pressures and a risk-averse mood may tighten financing conditions, pushing bond yields higher."

Subsidy Pressures

Emerging market governments are already spending hundreds of billions of dollars annually to alleviate the burden of rising energy prices on households, with recent hikes likely to increase these figures.

The IMF estimates that global fossil fuel subsidies will amount to $725 billion in 2024, or 6% of global GDP. This represents a decrease from 12% in 2022, when the comprehensive Russian invasion of Ukraine raised energy costs.

While these calculations do not exclude emerging markets, the Fund states that the Middle East, North Africa, Europe, and Central Asia provide three-quarters of global subsidies.

Joanna Chua from Citi stated in a client memo: "We anticipate increasing financial risks in emerging markets due to price caps, tax cuts, and subsidies if this energy crisis persists for longer," highlighting that Egypt, Turkey, Indonesia, India, Hungary, and Poland are particularly vulnerable to these risks.

The Fragile Few

Egypt, Sri Lanka, and Pakistan belong to a group of low-income countries that have faced crises, and analysts fear they may return to a cycle of problems.

In Egypt, not only are fuel and food costs rising, but tourism revenues, which brought in about $20 billion last year, may also decline, along with remittances from workers in the Gulf countries.

The 9% drop in the Egyptian pound this year also means that the cost of repaying its debts, which amount to about $30 billion, has risen sharply.

Sri Lanka, which declared a debt default in 2022, has resumed offering fuel subsidies and negotiated temporary relief from the IMF to gain some breathing room amid the current crisis.

Pakistan's total foreign reserves stood at $16.4 billion at the end of March, which covers essential imports for less than three months. Analysts warn that reserves are effectively negative when considering the central bank's commitments in foreign currencies.

Another Blow to Africa

The IMF illustrates how severely several poor countries in sub-Saharan Africa are impacted by the current situation.

IMF President Kristalina Georgieva stated at an event in London last week: "We are facing a negative supply shock," emphasizing that "the worst thing to do is to try to amplify demand," as some countries do by providing subsidies to the entire population, instead of just to those in critical need.

It is expected that the Fund will have to provide additional emergency support ranging from $20 to $50 billion due to the crisis.