## 📈 Middle East Conflict: Risks to Global Growth & Fiscal Stability

A prolonged Middle East conflict poses significant credit challenges for developed markets (DMs), primarily through surging energy costs and weakened economic growth, according to Fitch Ratings. • Energy & Inflation Impact: Higher oil and gas prices remain the most direct contagion channel. While the baseline expects Brent to average US$ 70/bbl in 2026, a stress scenario of US$ 95-100/bbl could push several DMs toward recession. • Vulnerable Regions: Japan and Korea: Projected to face the greatest hit to growth due to high energy/transport costs eroding real incomes. UK, Italy, and France: High exposure to acute inflation risks based on their energy supply composition. Central/Eastern Europe: Taiwan, the Baltic states, and Slovenia are identified as highly sensitive among smaller DMs. • Fiscal & Monetary Outlook: Fiscal Pressure: Government debt ratios are already elevated. Targeted interventions like price caps or tax rebates could widen budget deficits further. Borrowing Costs: Eurozone bond yield spreads have risen by an average of 29bp since late February, increasing long-term refinancing costs. Monetary Policy: Central banks face a difficult trade-off; rate hikes to curb energy-led inflation may be constrained by weakening employment and demand. • Sri Lankan Context: While the report focuses on DMs, prolonged global volatility and high oil prices traditionally pressure Sri Lanka’s energy imports and logistics costs, potentially impacting export competitiveness in sectors like apparel & textiles and tea.