US-Iran tensions could impact emerging market economies, Fitch Ratings warns

Emerging market economies may experience increased economic and financial strain due to the ongoing conflict involving the United States, Israel and Iran, global credit rating agency Fitch Ratings has cautioned.

Fitch, in its report, titled “Iran conflict raises new credit risks for emerging market sovereigns”, highlighted that sustained disruptions to energy supplies from the Gulf could have serious consequences for countries dependent on imports.

The report also warned that remittances, exchange rates, and investor sentiment in affected emerging markets could come under pressure.

“More sustained disruption to energy flows than currently assumed in our baseline scenario could significantly damage global investor sentiment,” Fitch said, noting that such shocks could amplify fiscal pressures and balance-of-payment challenges for vulnerable governments.

The agency emphasised that sovereign credit profiles of emerging markets might be affected if energy costs rose sharply or capital flows became volatile, potentially increasing borrowing costs and straining public finances.

Fitch’s warning underscores the interconnected nature of geopolitical risks and emerging market stability, highlighting the sensitivity of these economies to external shocks in critical sectors as energy.

“We expect this would result in a stronger US dollar and weaken the market for debt issuance, particularly for highly speculative-grade issuers.

‘‘Higher energy prices could put upward pressure on inflation, affecting monetary policy decisions globally,” the report said.

Fitch said oil and gas imports were the most direct channel for contagion from the conflict, given its effect on global energy prices.

For larger economies, such as India, net fossil fuel imports are equivalent to 3 per cent or more of GDP.

“The Iran conflict could raise additional challenges for some emerging market sovereigns, through such channels as energy imports, remittances, fiscal subsidies, exchange rates, and access to international finance,” Fitch Ratings said.

-- With Agencies inputs