The Iran conflict is creating a dangerous financial spiral for emerging market economies, as surging oil prices drive a strengthening US dollar that amplifies the cost of energy imports for countries that can least afford it. With Brent crude above $91 a barrel and the dollar gaining against most emerging market currencies, the double squeeze of higher oil prices in a stronger currency is creating acute financial stress across the developing world.
The mechanics of the squeeze are well understood but no less painful for that. Most oil is priced in US dollars, meaning that when oil prices rise and the dollar strengthens simultaneously, the local currency cost of oil imports rises by more than the crude price increase alone would suggest. For an emerging market economy with a currency that has weakened 10% against the dollar while oil prices have risen 25%, the effective local currency oil price increase is closer to 38%.
The countries most exposed to this squeeze are those that combine heavy dependence on oil imports, significant dollar-denominated debt, and limited foreign exchange reserves. Many sub-Saharan African nations, several South Asian economies, and a number of Latin American countries fit this profile. For their governments and central banks, the options are limited: accept higher inflation, raise domestic interest rates to defend the currency, or seek emergency financing from international institutions.
The Gulf energy emergency driving the squeeze shows no signs of quick resolution. Kuwait has cut production due to storage constraints, Saudi Arabia and UAE face the same crisis within 20 days, and Qatar’s LNG exports are disrupted. Qatar’s energy minister has warned of oil at $150 if all Gulf exporters halt production — a price at which the emerging market squeeze would become a full-blown debt crisis for many vulnerable economies.
International institutions are watching the situation with increasing alarm. The IMF’s emergency lending facilities, already stretched by the demands of the post-Covid recovery period, could face renewed pressure from emerging market governments seeking support. Financial markets in developed economies have registered severe weekly losses; the damage in emerging markets, where there is less financial cushion to absorb shocks, is likely to be even more severe.