Iran war raises new credit risks for emerging market sovereigns: Fitch

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 recently said.

Hydrocarbon exporters could see positive effects. Under Fitch’s baseline scenario, in which the effective closure of the Strait of Hormuz lasts less than a month and major damage to the region’s oil production infrastructure is avoided, risks to emerging market ratings should be contained, but a longer closure or more sustained effects could lead to a more substantial impact.

Iran war 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 has said.
Hydrocarbon exporters could see positive effects.
Prolonged higher energy prices would also raise fiscal strains for governments that have subsidy regimes to shield consumers.

Net fossil fuel imports are large as a share of gross domestic product (GDP) for many small emerging markets. Among the larger economies, Fitch estimates they are equivalent to 3 per cent or more of GDP for Chile, Egypt, India, Morocco, Pakistan, the Philippines, Thailand and Ukraine.

Vulnerabilities to higher import costs will be most acute in markets with already stretched financing capacity, such as Pakistan, or with significant current account deficits.

In December 2025, Fitch had anticipated a significant current account deficit this year in Ukraine (15.4 per cent), with moderate deficits for the Philippines (3.4 per cent) and Egypt (3.0 per cent).

More protracted high energy prices could add to external strains facing these sovereigns, especially if other stresses emerge, for example, disruption to remittances. External finance risks will be limited where sovereigns are running current account surpluses, as in Thailand.

Prolonged higher energy prices would also increase fiscal strains for governments that have subsidy regimes designed to shield consumers, or that launch similar measures in response to higher energy prices, Fitch Ratings said in its release.

A more sustained disruption to global energy supplies from the Gulf than envisaged under Fitch’s baseline scenario could significantly damage global investor sentiment which 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.

These factors are likely to increase the effective cost of servicing and refinancing debt for emerging market sovereigns.

However, many frontloaded a significant share of their planned foreign-currency issuance for the year in January-February, enhancing their flexibility against temporary market volatility.

Weaker non-oil activity in Gulf Cooperation Council (GCC) states, reflecting damage to logistics and tourism sectors, will hurt countries where exports to the affected region, or remittance flows from it, are a significant economic driver.

Azerbaijan, Iraq and Turkiye could be affected if instability in Iran leads to a major outflow of refugees.

For emerging market net hydrocarbon exporters outside the Gulf, such as Angola, Argentina, Azerbaijan, Brazil, Colombia, Ecuador, Gabon, Kazakhstan, Nigeria and Republic of Congo, a prolonged period of higher energy prices could lead to an export and fiscal windfall, Fitch Ratings added.

Fibre2Fashion News Desk (DS)