The Damocles sword of $100 oil prices: Emerging markets' vulnerabilities go far beyond inflation

⑴ Analysts warn that the surge in energy prices triggered by the Iran war poses pressures on emerging markets far beyond inflation. If the conflict persists, Brent crude may break through the $100 mark, with geopolitical risks already pushing oil prices to their highest levels since July 2024.⑵ The shock in oil prices will directly erode the external balance of emerging markets. ING analysis shows that a mere 10% increase in oil prices can worsen the current account balance of emerging markets by 40 to 60 basis points, with Thailand, South Korea, Vietnam, and the Philippines facing the greatest risks.⑶ Goldman Sachs estimates that a supply-driven rise in oil prices from $70 to $85 will increase the inflation rate across emerging Asia by about 0.7 percentage points, while economic growth will decline by about 0.5 percentage points, and almost all economies will see an expansion in their current account deficits.⑷ For economies with weak reserves, the situation is even more severe. Citigroup warns that a prolonged oil shock could "seriously undermine" inflation expectations, leading countries such as Argentina, Sri Lanka, Pakistan, and Turkey to face higher risks of capital outflows and currency depreciation.⑸ As for specific countries, India, due to its scarce oil reserves, will be one of the most vulnerable to the impact of sustained supply disruptions. JPMorgan has upgraded its EMEA emerging market FX rating to "market overweight," while separately placing the Polish zloty on the "underweight" list, indicating a repricing of risk exposure by institutions.