The Iran war delivers a “stagflation shock,” with emerging market growth revised down, inflation revised up, and assets under pressure

Overview

This EM Macro Navigator issue discusses the impact of the Iran war on global energy supply. Starting from Goldman Sachs commodity team’s oil and gas price forecasts, the report analyzes the transmission into emerging market growth, inflation, external balances, fiscal and monetary policy, and asset prices. The core judgment is that the energy shock creates a classic stagflationary pressure, with most emerging markets facing lower growth, higher inflation, and tighter financial conditions.

Core views

The report argues that the Iran war has effectively closed the Strait of Hormuz. In normal times, roughly one-fifth of global oil and gas shipments pass through this channel, so the near-term supply bottleneck is significant. Goldman raises its forecasts for energy prices such as Brent, TTF, and JKM, and accordingly lowers growth forecasts and raises inflation forecasts for most emerging markets. The economies most affected are the Middle Eastern and Gulf economies directly exposed to the war, lower-income Asian economies dependent on imported energy, economies with large current account deficits, and countries with unstable inflation expectations; the relative winners are mainly energy exporters outside the conflict zone, such as Russia and Brazil.

Analysis framework

The report uses a top-down macro transmission framework: first set the oil and gas supply and price path, then assess trade conditions, inflation, growth, current accounts, and policy responses, and finally map them into rates, FX, equities, and sovereign credit markets. The scenario analysis includes baseline, adverse, and severely adverse energy shock paths.

Methodology notes

• macro scenario analysisEnergy supply shock - stagflation transmission framework

  Oil and gas supply constraints affect emerging markets through prices, terms of trade, inflation expectations, and financial conditions.

  The report first assumes Hormuz flows are restricted to about 5% of normal in the near term, then transmits the energy price path into each country's CPI, real GDP, current account, and policy rate forecasts.

• asset allocation analysisEmerging market asset stress test

  Distinguish damaged and benefiting assets based on energy import dependence, external balances, degree of inflation anchoring, and policy space.

  Energy-exporter currencies and assets may hold up relatively better, while energy importers, current-account deficit countries, and countries with policy dilemmas are more likely to face FX, rates, and growth pressure.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• EM rates

  The energy shock lifts inflation expectations and triggers rapid repricing at the front end.

  Strengths

  Front-end rate selling in some markets may be excessive, creating opportunities to receive front-end rates.

  Weaknesses

  If the shock lasts longer, central banks may be forced to hike rates or delay cuts.

  Comparison

  Goldman believes the current situation differs from 2022, with a weaker growth tailwind, so the market should not simply apply the large tightening path seen after the previous energy shock.

  Risks

  Unanchored inflation expectations, currency depreciation, and declining policy credibility could force more aggressive tightening.

• EM FX

  FX performance is driven mainly by the terms-of-trade shock.

  Strengths

  Commodity-linked currencies such as BRL, COP, and MYR may outperform relatively.

  Weaknesses

  Currencies such as INR and TRY, which are energy importers and have vulnerabilities, may remain under pressure if the conflict lasts.

  Comparison

  HUF, KRW, ZAR, and CLP have already repriced weaker, making the further path more two-sided; INR and TRY’s earlier resilience depended more on central bank action.

  Risks

  A more persistent oil shock may force central banks to choose between allowing depreciation and hiking more aggressively.

• EM equities

  Rising energy costs, tighter financial conditions, and downward growth revisions pressure valuations.

  Strengths

  Goldman still prefers technology/AI exposure and metals mining, and recommends overweighting China, Korea, Brazil, and South Africa.

  Weaknesses

  MSCI EM has already fallen sharply, and overall risk appetite has been hit.

  Comparison

  EM equities have broadly tracked DM ex-US lower, but have underperformed the S&P 500 since the conflict began.

  Risks

  Earnings downgrades, energy shortages, and global growth shocks may further weigh on valuations.

• commodities

  Oil and gas are the starting point of this shock, and their price path determines the strength of macro and asset transmission.

  Strengths

  Energy exporters outside the conflict zone and some coal and precious metals exporters may benefit.

  Weaknesses

  Energy importers, petrochemicals, fertilizers, and transport-intensive sectors face cost pressure.

  Comparison

  Asian buyers are affected by the Middle Eastern oil premium, with the shock larger than in the U.S. natural gas market.

  Risks

  A longer Hormuz shutdown, permanent capacity damage, or rising strategic stockpile demand would keep prices elevated for longer.

• EM sovereign credit

  Growth downgrades and the oil shock widen credit spreads, especially for high-yield sovereigns.

  Strengths

  Investment-grade oil exporters are relatively defensive.

  Weaknesses

  High-beta, high-yield sovereigns are more vulnerable as the market shifts from pricing hawkish policy shocks to pricing growth downside shocks.

  Comparison

  Current spreads are still in a historically tight range, and the market is pricing hawkish policy more than a growth shock.

  Risks

  A prolonged conflict could further widen spreads for exposures such as Bahrain and Jordan.

Key data

• Hormuz Strait energy flow assumptionNearly shut through mid-April, then gradual normalization over about 30 daysThe base case assumes short-term flows are constrained; the adverse case assumes a 10-week closure, while the severely adverse case also includes a long-term production loss of 2 mb/day.
• Brent oil price forecastUS$105/bbl in March, US$115/bbl in April, and US$80/bbl in Q4 2026The prior Q4 forecast was US$71/bbl.
• Asian crude price impactAverage Asian crude price forecast for the rest of the year revised up by about 30%Driven by the higher Brent forecast and a wider Dubai-Brent spread.
• Natural gas price forecastTTF and JKM forecasts for the rest of the year revised up 16%–18%Mainly driven by the sharp increase in Q2 prices; U.S. natural gas prices change less.
• EM growth forecastMedian cut by more than 0.5 percentage pointThe downward revisions are larger for Saudi Arabia, Israel, and energy-dependent economies.
• EM inflation forecastMedian raised by nearly 1 percentage pointTurkey and Argentina are raised by more than 5 percentage points, with large increases also in the Philippines, Romania, Egypt, etc.
• Financial conditionsEM FCI tightened by about 80 bp from its loosest pointThe war has altered the previously looser financial environment.
• Equity marketMSCI EM has fallen more than 10% over the past monthGoldman still expects MSCI EM earnings growth of 23% this year, or 11% excluding AI-related Korea and Taiwan.
• Sovereign creditThe 12-month target spread for the EM hard-currency index is kept at 300 bpThis implies room for a modest further widening.

Impact & implications

For investment implications, the energy shock is short-term bearish for most emerging market assets, especially energy-importer currencies, economies sensitive to energy costs, countries with unstable inflation expectations, and high-yield sovereign credit. On the policy side, fiscal subsidies and price controls may cushion household-level pain, but if energy prices rise further, the sustainability of these buffers will weaken and inflation pass-through may become more nonlinear.

Risks

• The Iran war and the disruption to the Strait of Hormuz last longer than the baseline scenario.
• Rising energy prices spread from fuel into food, fertilizer, transport, and core goods prices, leading to broader inflation.
• Low-income energy importers experience energy shortages, rationing, or production cuts.
• Fiscal subsidies and price controls prove unsustainable, ultimately leading to stronger CPI pass-through and fiscal strain.
• FX depreciation and inflation expectations reinforce each other, forcing more aggressive rate hikes by central banks.
• The market shifts from pricing hawkish policy to pricing growth downside, causing further pressure on equities and high-yield sovereign credit.

What to watch

• Whether actual traffic through the Strait of Hormuz recovers after mid-April in line with the baseline scenario.
• Whether Brent, Dubai, TTF, and JKM prices continue to diverge from the baseline path.
• Inflation and FX performance in vulnerable economies such as India, the Philippines, Thailand, Romania, Turkey, and Argentina.
• Whether Asian energy importers expand subsidies, price caps, rationing, or industry usage limits.
• Whether EM central banks shift from wait-and-see to rate hikes, especially in India, the Philippines, Egypt, and Turkey.
• Whether MSCI EM earnings expectations, EM FCI, front-end rates, and sovereign credit spreads continue to deteriorate.