Emerging markets: Energy shock risks and buffers – BNP Paribas

BNP Paribas argues emerging economies face a renewed stagflationary energy shock, but are not generally more vulnerable than in 2022. The bank highlights limited exchange rate depreciation, existing price-mitigation schemes, and stronger reserves. However, it warns that higher hydrocarbon prices will still weigh on growth and inflation, with some low‑income and frontier markets facing heightened solvency and external liquidity risks.

Stagflation risk but broader resilience

"Whether the scenario entails a moderate but sustained rise in oil prices or a very sharp but temporary rise, macroeconomic simulations show that the negative impact on growth for net importers far outweighs the positive impact for net-exporters countries. In the first scenario, there would be no positive impact for exporting countries whatsoever. Indeed, a commodity price shock is never a zero-sum game."

"Compared with 2022, there are three moderating factors. First, the spike in hydrocarbon prices has not spread to the prices of key agricultural commodities (wheat, maize, cotton, rice). Second, although Asian countries are experiencing direct impacts from supply disruptions, they are benefiting more than other EMs from the development of artificial intelligence."

"The direct impact on inflation will depend on: i) the share of energy in price indices; ii) fluctuations in the exchange rate relative to the US dollar; iii) the introduction (or strengthening) of mechanisms to mitigate the rise in energy prices for consumers or producers. Furthermore, the overall effect of the shock will be determined by its spillover to the broader price level: it will be more significant the higher the inflation rate and/or the further along the economy is in the economic cycle."

"Overall, financial conditions remain largely unaffected The shock has put pressure on domestic interest rates. In Asia, the rise has been moderate (35 basis points [bp] or less), except for the Philippines (+70 bp). It has also been moderate in Brazil and Mexico (+40 bp)."

"For emerging economies, the risk of a balance of payments crisis associated with a spike in energy costs is, in principle, low. Nevertheless, Argentina, Egypt, Pakistan and Ukraine require support from financial institutions and major international banks to service their external debt."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)