Iran-War Impact: EM Economic Strain & Risks for Sri Lanka 📈

Two months into the Iran conflict, emerging markets (EM) face mounting fiscal pressure and inflation as the IMF cuts EM growth projections to 3.9%. • Key Economic Impacts: The closure of the Strait of Hormuz has slashed exports in major energy hubs like Qatar by over 90%. While oil producers like Brazil have seen currency gains, EM as a whole faces a "negative supply shock" and rising energy costs. • Monetary & Fiscal Strain: Inflationary pressures have forced a hawkish turn in India, the Philippines, and Turkey. Global fossil fuel subsidies (6% of global GDP) are creating "growing fiscal risks" for governments attempting to cushion households from price spikes. • Focus on Sri Lanka & Fragile Markets: Sri Lanka, Egypt, and Pakistan are identified as "crisis-scarred" nations at risk of further instability. • Sri Lanka has recently reintroduced fuel subsidies to manage domestic costs. • The government has negotiated a temporary easing of IMF financing conditions to gain "breathing space" amid the global shock. • Unlike Egypt, which faces a 9% currency slump and tourism hits, Sri Lanka's primary challenge remains balancing fiscal recovery with soaring energy import costs. • Regional Outlook: Emerging Asia remains highly vulnerable, with over 50% of crude and 33% of gas imports traditionally transiting the now-disrupted Strait of Hormuz. The IMF anticipates providing $20 Bn to $50 Bn in additional emergency support globally due to the crisis.