Two months since the outbreak of the Iran war, data shows the economic toll is spreading beyond the Middle East, with emerging and developing markets facing rising inflation, growing fiscal strains and trade disruptions.

Middle East nations and those nearby are seeing the most direct economic hit.

Qatar posted its first-ever trade deficit at $1.2 billion in March after the closure of the Strait of Hormuz slashed exports by more than 90% and halved imports.

JPMorgan economists expect Qatar's economy to shrink 9% this year following damage to a liquefied natural gas (LNG) plant, a deeper contraction than the International Monetary Fund’s minus 6.1% forecast for Iran.

The IMF cut growth projections for emerging and developing economies as a group to 3.9% from 4.2%. And this month's IMF and World Bank meetings in Washington included stark warnings.

"A full-fledged impact is coming and it is not far away," Qatari Finance Minister Ali Ahmed Al-Kuwari told the event.

Emerging Asian markets are particularly vulnerable, as more than 50% of crude imports and more than a third of gas imports traditionally come through the Strait of Hormuz.

However, distant producers have benefited from higher crude prices.

Brazil and Kazakhstan's currencies strengthened more than 9% year-to-date, and emerging market stocks have bounced back to record highs, with tech-heavy markets such as South Korea and Taiwan adding to the boost.

Turning tankers

The jump in energy costs and the resulting inflationary pressures have curbed central banks' room to cut interest rates and started pushing them in the other direction instead.

The Philippines hiked rates last week, while Türkiye, Poland, Hungary, Czechia, India and South Africa have started turning more hawkish, given the dangers of "second-round effects," where wages and other key knock-on costs rise.

JPMorgan says markets in most of the 15 major emerging economies it tracks are pricing in tighter monetary policy over the next six months. Economists are predicting it, too.

"Rising inflationary pressures and risk-off sentiment could tighten financing conditions, pushing bond yields higher," Zahabia Gupta at S&P Global said in a note.

Subsidy strains

Emerging market governments already spend hundreds of billions of dollars a year cushioning households from high energy prices, and the latest spikes are set to push those numbers higher.

The IMF estimates that global fossil fuel subsidies amounted to $725 billion in 2024, or 6% of global gross domestic product (GDP). That is down from 12% in 2022, when Russia's full-scale invasion of Ukraine sparked a jump in energy costs.

While the calculations do not isolate emerging markets, the fund says the Middle East, North Africa, Europe and Central Asia region dishes out three-quarters of the subsidies globally.

"We see growing fiscal risks in EM from capping prices, from tax cuts and subsidies if this energy shock is more persistent," Citi's Joanna Chua said in a note, pointing to Egypt, Türkiye, Indonesia, India, Hungary and Poland as particularly vulnerable.

The fragile few

Egypt, Sri Lanka and Pakistan belong to a group of crisis-scarred, lower-income countries that analysts fear are being pulled back toward economic trouble.

In Egypt, fuel and food costs are surging while tourism revenues, which brought in nearly $20 billion last year, could drop alongside remittances from those working in the Gulf.

A 9% slump in the Egyptian pound this year also means the cost of repaying its debt, with nearly $30 billion in payments due, has soared.

Sri Lanka, which defaulted in 2022, has reintroduced fuel subsidies and negotiated ⁠a temporary easing on its IMF financing to get some breathing space.

Pakistan's gross foreign exchange reserves stood at $16.4 billion by the end of March, covering less than three months of basic imports. Analysts warn they are actually negative if the central bank's foreign currency liabilities are factored in.

Another blow for Africa

Poorer countries in sub-Saharan Africa are being hit particularly hard.

In many cases, a dependence on imported oil overlaps with stretched government finances; the longer crude prices stay high, the more fiscal pressure builds.

"We have a negative supply shock," IMF Managing Director Kristalina Georgieva said at an event in London last week.

She stressed that "the worst thing to do is to try and balloon demand," as some countries are doing by providing population-wide subsidies, rather than offering them just to those who need it most.

Georgieva expects the fund will have to provide $20 billion to $50 billion in additional emergency support due to the crisis.