Iran War’s Energy Shock Puts Some Major IMF Borrowers at Risk

huxfp9u{0r{]dlimmfo1)7aw_media_dl_1.png International Monetary Fund

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(Bloomberg) — Conflict in the Middle East is sending shockwaves across the developing world, raising the prospect that emerging economies will turn to the International Monetary Fund for more help.  

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The US-Israeli war on Iran that began three weeks ago has caused a spike in oil and natural gas prices, as well as disruptions in supplies of fertilizers and other commodities. Top IMF borrowers like Egypt and Pakistan — heavily dependent on imported energy and food — are set to be among the hardest-hit countries.

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At a press conference in Washington Thursday, spokeswoman Julie Kozack said the fund hasn’t gotten any new requests for emergency financing. Still, the lesson from past episodes of global turbulence – from the 2008 crisis to the pandemic – is that they could well be on the way.

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“A prolonged conflict will lead to higher financing needs for many countries, which will result in new IMF program requests and adjustments to existing ones,” said Martin Muhleisen, formerly a senior IMF official and now a fellow at the Atlantic Council.

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“The transmission mechanism is fairly clear,” he said. “There is a direct hit from higher energy and fertilizer prices, and other import prices will rise with the uptick in global inflation.”

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Already, governments in import-dependent countries have been forced into emergency measures, to mitigate an energy shock that may yet worsen. 

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Pakistan closed schools for two weeks to save energy, and has extended talks with the fund on its current $7 billion program to better assess the impact of the war.

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Egypt, which has an $8 billion IMF loan deal in place, ordered shops and cafes to close earlier, and Sri Lanka announced a four-day week for public employees. Morocco said it may draw on the credit line it agreed with the IMF last year — worth some $4.7 billion — if oil climbs above $120 a barrel. Brent crude was trading at roughly $107 late Thursday, after shooting up from around $70 before the war

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Beyond the impact of costly energy and food, these economies also risk financial damage via reduced remittances from citizens working in the Gulf, and a hit to tourism industries.

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The IMF said it’s monitoring counties that depend on those income sources, and engaging “very actively” with its membership. “We are asking them how we can best support them at this time,” Kozack told reporters. 

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Looking at some of the largest IMF borrowers, Kozack said the impact of the war has so far remained “relatively contained” in Egypt, while Argentina has weathered the shock “relatively well” thanks to its status as a net energy exporter.

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The risks aren’t confined to the conflict zone in the Middle East. 

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Even some developing economies without an IMF program in place, like South Africa, have warned that fiscal buffers won’t be enough if the war drags on. 

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In Indonesia – Southeast Asia’s largest economy and the region’s top importer of oil products — the government is already seeking spending cuts to keep its budget deficit within the legal limit of 3% of gross domestic product. 

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“Countries with large oil imports, low external buffers and high financing needs are most at risk – and these do not necessarily have to be located near Iran,” said Aurelie Martin, a former IMF economist and now a fixed-income analyst at asset manager Ninety One. If oil importers “can’t obtain financing at a reasonable cost, then turning to the IMF is an option,” she said. 

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