Emerging Markets: Resilience Tested, Not Reversed

The oil and supply shock is testing emerging markets but has not reversed their improved resilience, making country selection more important than a uniform bearish view.

• Higher oil prices hurt net importers through inflation, current accounts, currencies and central-bank trade-offs, while exporters benefit; Korea, Vietnam and the Philippines are particularly exposed, whereas Brazil and Colombia have commodity offsets.
• The Strait of Hormuz transmits the shock beyond crude: it carries about 50% of global urea exports, 30% of ammonia, 29% of helium, 19% of LNG and 19% of refined oil exports, affecting agriculture, food processing, semiconductors, healthcare and industrial production.
• A persistent shock could create delayed food inflation, amplified by a strong El Niño in the second half of 2026, while short disruptions can be absorbed through inventories, reserves, subsidies and currency flexibility.
• Emerging markets entered the episode in better condition: external debt service is near multi-decade lows as a share of GDP, local-currency funding markets are deeper, hard-currency dependence is lower and aggregate debt-service burdens remain well below the roughly 10% of GDP level associated historically with severe stress.
• Policy responses have cushioned the initial impact, but fiscal costs are rising; India allowed petrol and diesel prices to increase by about 3%, while more deregulated markets such as the Philippines passed global price increases through more quickly.

Takeaway: Investors should focus on external positions, policy credibility, commodity or AI-linked export buffers and fiscal room, because a prolonged shock could still erode current accounts, reserves and financing conditions even if it does not trigger broad EM stress.