US-Israel war in Iran: macro impact on emerging and frontier countries

• Main transmission channel is through higher oil prices and its impact on current accounts (oil exporters vs importers)

• Higher oil prices also pose upside risks to DM and EM inflation, while war could increase global risk aversion

• We look at the possible current account hit alongside reserve cover to see who is most vulnerable to higher oil prices

  
  

In this note, we assess the macroeconomic impact of the US-Israel war in Iran on the global economy and emerging and frontier markets. Clearly, a longer and wider conflict will have more of an impact than a short and contained one (although economies and markets will adapt to a longer conflict over time).

The main transmission channel is through higher oil prices and its balance of payments impact (impact on the current account). Oil prices have already risen 18% to US$85.4 (to 5 March) on actual disruption and threats to supply (gas prices are also higher, particularly in Europe), with some analysts predicting oil will get to US$100pb. This will create winners and losers for oil exporters and importers respectively, other things equal.

Higher oil prices also pose upside risks to global inflation. There may however be reasons to think the inflation impact of this oil price shock will be milder compared to the last global price shock, in 2022, which unsettled most countries, for two reasons. First, that was broader, extending to oil and other commodities (food). Second, inflation was already rising back then, while it has been low and stable over the last few years.