ENERGY OUTLOOK 

OIL SHOCKS RATTLE EMERGING ECONOMIES

Prashanthi Cooray examines how the Middle East conflict is straining developing markets worldwide and where Sri Lanka fits into this story

Every time oil prices surge, the consequences travel beyond petrol stations. They are felt on factory floors in Vietnam, in tea estates in Sri Lanka, at construction sites in the Gulf and in households across emerging markets already grappling with the rising cost of living. 

The latest Middle East conflict has once again demonstrated how a geopolitical shock in one region can cascade into economic strain across the developing world.

With disruption to shipping through the Strait of Hormuz, the shock spread well beyond energy markets. And for Asia, where most economies are net energy importers, the challenge is particularly acute. 

The Asian Development Bank (ADB) warns that if disruptions persist, growth across developing Asia and the Pacific could slow by as much as 1.3 percentage points while inflation could rise by around 3.2 percent. 

ADB cautions that governments are being forced to balance slowing economic activity against the need to contain inflation, often with limited fiscal space.

The fallout extends beyond energy and trade: as geopolitical uncertainty intensifies, borrowing costs are rising and financial markets are becoming more volatile, adding fresh pressures on already stretched emerging economies.

How these pressures play out differs from one country to another…

As one of the world’s largest crude oil importers, India faces rising import bills that widen its current account deficit and add to inflationary pressures. In Pakistan, where external financing remains fragile, higher energy costs threaten already constrained foreign exchange reserves and public finances. 

Meanwhile, export oriented economies such as Vietnam face rising electricity, transport and logistics costs that could erode manufacturing competitiveness.

Elsewhere in Southeast Asia, Thailand and the Philippines are grappling with higher fuel costs that weigh on household purchasing power, while increasing costs in the transport and tourism segments. 

Indonesia and Malaysia present a more nuanced picture: although both benefit from natural resource exports, governments also face higher subsidy costs and fiscal pressures as they seek to cushion consumers from rising fuel prices.

Moreover, the effects extend well beyond Asia… 

According to the IMF, commodity exporters such as Brazil and Ecuador may initially benefit from stronger export earnings and improved fiscal revenues. Yet, even these gains could prove temporary if prolonged geopolitical uncertainty dampens growth and tightens financial conditions. 

Across many African economies, higher fuel and fertiliser prices are increasing the cost of living with lower income households bearing the largest burden.

The World Bank warns that the disruption is no longer simply an oil story. Fertiliser prices are projected to rise sharply this year as Gulf supply chains remain constrained, increasing production costs for farmers worldwide. 

While world food supplies remain relatively adequate, sustained increases in fertiliser and transport costs could eventually feed into higher food prices. The humanitarian consequences are already becoming evident. The World Food Programme (WFP) estimates that the crisis could leave up to 1.3 million additional Sri Lankans unable to meet their basic food needs. 

Yet, Sri Lanka has so far demonstrated a measure of resilience. 

Following its latest staff mission, the International Monetary Fund noted that government revenue collection has remained robust despite higher energy prices and slower tourism growth. Although inflation accelerated after the oil shock – prompting tighter monetary policy – the IMF observed that economic activity has continued to recover, supported by ongoing fiscal reforms.

Nevertheless, it stresses that resilience cannot be taken for granted. 

Maintaining tax reforms, improving public finances, preserving cost reflective energy pricing and protecting vulnerable households through targeted social assistance will remain critical if global uncertainty persists.

History shows that oil shocks often outlast the conflicts that trigger them. While energy markets may eventually stabilise, the lesson for emerging markets is that geopolitical tensions can rapidly evolve into economic challenges. 

Building resilience through stronger institutions, sound macroeconomic policies and greater energy diversification may be the most valuable investment of all.