Poland had previously been “lumped together” with other rapidly modernising economies during various crises, even though our economic performance was, at specific moments, usually stronger than that of other comparable countries. Unfortunately, we are now more exposed than many other economies to the effects of the current crisis—not only because of our significant dependence on supplies from the Gulf region, but also because the current energy crisis highlights a structural weakness: Poland’s “triple deficit.”
- Less than two months of disruption in the Strait of Hormuz could increase average inflation in emerging markets by +0.8–1.0 percentage points, with only limited recessionary effects—except for the GCC countries (members of the Gulf Cooperation Council). Allianz Trade estimates that a closure of the Strait of Hormuz for up to six weeks would reduce GDP by 1.6 percentage points in Saudi Arabia and by 3.3 percentage points in the United Arab Emirates. Tourism—a key pillar of economic diversification in the Gulf region—would also suffer in the short term, with spillover effects including reduced foreign direct investment inflows and delays to megaproject timelines, including AI-related projects.
- From a price shock to a supply shock? As the conflict drags on, Asian economies may face supply disruptions alongside stronger inflationary shocks, given that 56% of their crude oil imports and 30% of total gas imports come from the Middle East. In Asia, Taiwan, Vietnam, Thailand, Pakistan, Bangladesh and Sri Lanka are particularly exposed to supply shortages, while in Africa the hardest-hit countries would be Egypt, Ethiopia, Kenya and Tunisia, given their dependence on Middle Eastern hydrocarbons. A temporary shortage could be partially mitigated by adjusting the energy mix (i.e. coal and, to a lesser extent, renewables), but longer-lasting disruptions in energy supply would require demand rationing—a reduction of imported hydrocarbon consumption by 5–7% in final energy use if prices were to double.
- If the Strait of Hormuz remains closed for longer than three months, far more emerging markets would face a high risk of recession, as they struggle with a triple deficit (fiscal, current account and energy). The impact on GDP growth in emerging markets would range on average from at least 0.5 percentage points to 3.1% (excluding China). The countries most at risk of recession in the event of a prolonged conflict would be Bangladesh, Egypt, Ethiopia, Jordan, Kenya, Morocco, Pakistan, Poland, Romania, Sri Lanka and Tunisia. Another group of economies faces a moderately high recession risk, as they have greater room to support their economies—these include Chile, China, Hungary, India, the Philippines, Taiwan, Thailand and Turkey. Meanwhile, major commodity exporters such as Brazil and Mexico appear structurally resilient despite fiscal deficits, because energy exports cushion the impact of higher prices.
- The shock came at a time that had been favourable for carry trades in emerging markets (an investment strategy based on borrowing in a low-interest-rate currency and investing in a currency or asset offering a higher return). This calls for a selective, country-by-country assessment of each currency based on a targeted energy risk premium. An early market repricing has already begun: currency markets reacted quickly, with the Egyptian pound posting the sharpest depreciation (-9.2%), followed by the Hungarian forint (-8%) and the Chilean peso (-4.9%). The sell-off in local bond markets presents a much more varied picture. In Mexico, higher nominal yields are driven mainly by rising inflation expectations, while in Central and Eastern Europe—where the sell-off has been strongest—markets are pricing in a larger share of risk and liquidity premium. The shock is also complicating the monetary policy outlook: with energy-driven inflation risks rising, many emerging market central banks are likely to keep rates unchanged for longer despite slower economic growth. A prolonged conflict could trigger a more decisive repricing of inflation expectations along emerging market yield curves, steepening local yield curves and delaying monetary easing cycles. Overall, the correction is likely to be selective rather than systemic. The most likely scenario therefore is the emergence of a targeted energy risk premium for the most vulnerable emerging market economies, rather than a broad-based sell-off across the entire asset class.
From a Price Shock to a Supply Shock?
The 40% jump in energy prices in the first week of the conflict was the fastest transmission channel of its effects to the global economy. On March 9, the price of oil briefly reached USD 120 per barrel before later falling back to USD 80. This week, oil is still trading around 15% above its pre-conflict level. Even if energy transport is disrupted only briefly, the conflict will still have a lasting impact on energy prices, because restoring production and supply to pre-conflict levels will likely take several weeks. Allianz Trade expects prices to return—once hostilities end—to a level closer to USD 70 per barrel, which would still represent a 16% increase compared with pre-conflict levels. This shift could raise average inflation in emerging economies by 0.8–1.0 percentage points, although the scale of the increase will depend on each country’s exposure to the energy market (especially in Asia and among energy-importing emerging economies). Central and Eastern European economies—particularly Hungary and Romania—would suffer the largest GDP losses because of their strong dependence on imported energy, followed by Thailand and Chile. Oil exporters such as Nigeria, Colombia and Brazil would be relatively well protected, while among importers Indonesia stands out as being more resilient thanks to its significant domestic energy production capacity.
The most immediate economic effects are being felt above all by the countries closest to the conflict—in the Gulf region and across the broader Middle East—where normal economic activity has been directly disrupted. Initial estimates for a short-lived conflict point to GDP declines of -3 percentage points in Saudi Arabia and -4.3 percentage points in the United Arab Emirates, given severe economic disruption, weaker tourism and a temporary drop in energy exports caused by the effective closure of the Strait of Hormuz. However, a short conflict would also be followed by a relatively rapid economic rebound, with growth rates of +6.5% in Saudi Arabia and +7.6% in the UAE. GDP across the GCC as a whole would decline by -3.3 percentage points, followed by a strong rebound of +6.4% GDP growth in 2027. Dubai’s real estate sector—one of the most dynamic property markets in the world in recent years—suffered significant financial market losses in the week after the conflict began, with listed developers’ share prices plunging by 13%–17%. The rest of the region, especially Kuwait and Bahrain, would feel the strongest impact because of their dependence on the Strait of Hormuz for both exports and imports. Bahrain’s CDS spreads have widened by almost 40% since the outbreak of hostilities—the sharpest move in the GCC and a clear market signal that investors are differentiating Gulf credits based on fiscal resilience and hydrocarbon self-sufficiency.
A prolonged war scenario would cause more serious consequences through a significant decline in hydrocarbon exports and lower confidence in the region. History suggests several channels through which conflict could affect the region. The Iran-Iraq “Tanker War” of the 1980s, which threatened the closure of the Strait of Hormuz, had severe long-term consequences for Saudi Arabia’s growth rate, with the kingdom posting average growth of just +0.5% between 1981 and 1988, mainly because of lower oil exports. Although both Saudi Arabia and the UAE have some capacity to continue exporting oil via pipelines linking oil fields to ports outside the Gulf, a prolonged closure of the Strait of Hormuz would significantly constrain hydrocarbon exports from both countries. The hardest hit, however, would be Kuwait, Qatar, Bahrain and Iraq, which have very limited export options outside the Strait.
Saudi Arabia and the UAE have also enjoyed large inflows of investment and people—especially since the pandemic—thanks to open borders, tax breaks for residents and a growing number of leisure facilities and tourist attractions. Historical precedents suggest that tourism in the Gulf could recover within one to two years. However, if the conflict drags on and permanently alters perceptions of regional security—as happened in Egypt between 2013 and 2017—the recovery period could stretch to five to seven years, with complex consequences for foreign direct investment, megaproject timelines, the wider Vision 2030 agenda and the region’s ambitions to become a global AI hub. The physical threat to data centres is only part of the story (Iran has attacked at least three Amazon-operated data centres in the UAE and Bahrain); equally important are the broader consequences for economic activity, as such strikes could paralyse banks, government offices and more. Beyond the GCC, the rest of the region may also feel the consequences, and even countries as distant as Egypt or Turkey could see a decline in tourism.
The second wave of consequences from an attack on Iran would be a hydrocarbon shortage caused by a prolonged closure of the Strait of Hormuz. This would lead to a severe supply shock—a very different and more destructive scenario that in most cases would trigger recession in countries dependent on energy from the Gulf region. Asia would be the region most affected, given its heavy reliance on Middle Eastern hydrocarbons, with 56% of the region’s oil imports coming from the Gulf. Gas prices could potentially double, which could reduce gas consumption in Asia by 5–7%. Based on the European precedent, Allianz Trade estimates that every 1% drop in gas consumption would translate into a loss of 0.08–0.10 percentage points of GDP growth. For Asia, this could mean an impact of more than -0.5 percentage points of GDP for the hardest-hit countries, such as South Korea (-0.7 percentage points), or a more limited decline such as in India (-0.1 percentage points).
The impact on Asian economies will also be uneven—with Taiwan, Pakistan and Vietnam among the most affected, while Malaysia, Indonesia and China would remain in a relatively safe zone. Taiwan appears to be the most exposed country because of its heavy reliance on Middle Eastern hydrocarbons, the high share of oil in its energy mix and very low domestic oil stock levels. Pakistan and Vietnam are also in a fragile position, as around 40% of their oil consumption comes from Middle Eastern sources and reserves are very limited. Their energy mix is, however, somewhat less oil-dependent than that of other emerging markets with similar Middle East exposure but larger reserves. Despite reserves covering around one month, India—and especially Sri Lanka—share similar characteristics and are also highly vulnerable. Thailand is another economy at risk: despite relatively well-filled reserve storage and lower dependence on the Middle East, the country’s heavy reliance on oil in its energy mix could still result in a significant inflation shock, as it would have to pay more for oil than many peers. Similarly, if the conflict and closure of the Strait of Hormuz were to continue, the Philippines and Indonesia could also begin to experience some inflationary impact as more countries start competing for alternative suppliers, pushing prices higher. Despite its relative reliance on Gulf imports, China benefits from one of the region’s highest reserve levels combined with relatively low oil dependence in its broader energy basket. Indonesia, meanwhile, should be shielded from a strong inflation shock despite low reserves, given both its limited Middle East dependence and relatively low reliance on the rest of the world.
Emerging markets outside Asia are relatively better protected against disruption in the Strait of Hormuz. European emerging markets are relatively resilient to the current crisis thanks to low exposure to Middle Eastern oil—with the exception of Poland—as well as relatively low oil dependence in their broader energy mix and solid strategic reserves. Latin American countries, meanwhile, although more dependent on oil overall, are well insulated from the current energy shock because of their extremely limited dependence on Middle Eastern imports.
Chart 2: Dependence on Middle Eastern oil in selected emerging markets
Crude oil stock levels:
Note: Oil dependence is calculated as net crude oil imports from the Middle East divided by total oil consumption.
Sources: IEA, UN Comtrade, Allianz Trade Research
The final impact of the oil and gas market crisis on the global economy will also depend on the scale of support measures implemented by individual countries to cushion the blow for households and businesses. Policy responses could significantly soften the inflation shock, as seen during Europe’s 2022 energy crisis. At that time, European governments introduced energy support measures amounting to roughly 4% of GDP over one year, including price caps, tax cuts and transfers (subsidies). Assuming the current shock proves roughly half as severe as Europe’s 2022 energy crisis, Asian economies—given their greater dependence on imported energy—would likely require subsidies equal to around 0.25% of GDP (or around 2% on an annualised basis) to mitigate the impact on households and firms.
In Central and Eastern Europe, Hungary has already introduced fuel price caps, adding pressure to a budget deficit that already stands at -5.1%. In Asia, Indonesia, South Korea and Japan continue to support their citizens through energy subsidies and oil price caps. In the Middle East, Egypt finds itself in a particularly uncertain position: subsidies remain substantial, and the 2025/26 budget had already allocated 0.6% of GDP for them. With a fiscal deficit already at -10% and an equally large external deficit, Cairo could run into fiscal trouble. During the last crisis, the UAE and Qatar supported Egypt with major capital transfers, but given the Gulf capitals’ new wartime priorities, the question remains how Egypt could withstand a prolonged period of high energy prices.
Despite potential mitigation measures, disruptions to energy supplies would still require demand rationing. Although part of the hydrocarbon shortfall could be eased through energy mix adjustments—for example by temporarily increasing coal-based power generation—and roughly half of disrupted supplies could potentially be rerouted or offset by higher oil output elsewhere (especially in the US or Russia), supply substitution would only partially compensate for the disruption. In such a scenario, energy demand rationing would become unavoidable, affecting both businesses and households. Several Asian economies—from Japan to Thailand—are already feeling the effects of the Hormuz closure and have taken swift action to manage supplies, from fuel export bans and energy-saving policies such as four-day workweeks and remote work mandates to increased oil purchases from Russia. Europe’s 2022 experience illustrates the scale of adjustments that may be required. At the peak of that crisis, when gas prices tripled to EUR 330/MWh and EU dependence on Russia exceeded 40% of total gas imports, Europe managed to cut gas consumption by nearly 20% through a combination of high prices, supply shortages and emergency policy measures, including top-down consumption limits and public awareness campaigns.
The Middle East accounts for 30% of Asia’s total natural gas imports, although there are also meaningful differences across countries in this respect. India, with 80% of its imports coming from the Gulf, is the most exposed to conflict-driven gas price increases, followed by Vietnam and Indonesia. However, because natural gas does not account for a large share of energy production in these countries, the overall impact should remain relatively limited. Although the gas supply shock would be much smaller than in oil, Thailand, Taiwan and Pakistan should be monitored closely, because natural gas has a larger weight in their energy mix than the regional average and they are relatively dependent on Middle Eastern imports—especially Taiwan and Pakistan, where the Gulf region covers more than 25% of consumption.
More severe and systemic spillovers would emerge if the Strait of Hormuz remained closed for more than a short period, turning what began as a price shock into a structural disruption. Every additional week of closure increases recessionary pressure as reserves are depleted and supply shortages deepen. In a scenario lasting more than three months, emerging market GDP would fall on average by -0.5 percentage points or more, with the most energy-dependent economies bearing a disproportionate share of the burden. In such a scenario, emerging markets struggling with twin deficits—fiscal and current account—would come under severe pressure, as rising energy import bills would further widen already strained external balances and financing needs. The hardest hit would be countries facing a triple deficit—where fiscal and current account deficits are compounded by an energy balance deficit (as is unfortunately the case with Poland)—as they would face simultaneous pressure on their currencies, sovereign bond spreads (debt-servicing costs) and growth, while having very limited policy space to respond.
Countries with a simultaneous fiscal deficit, balance-of-payments imbalance and dependence on energy imports appear to be the most vulnerable to prolonged disruptions in Middle Eastern energy supplies. Economies such as Romania, Poland and Tunisia display the clearest triple-deficit configuration, where large fiscal deficits coincide with current account deficits and a structurally negative energy balance. In these cases, higher oil prices would simultaneously widen external deficits, worsen fiscal dynamics through energy subsidies or weaker growth, and weaken currencies by deteriorating terms of trade. Several emerging and lower-income importing countries—in particular Egypt, Sri Lanka, Kenya, Ethiopia, Jordan, Morocco and Bangladesh—also appear especially vulnerable to the cumulative effect of these deficits because of already high financing needs and limited macroeconomic buffers. By contrast, commodity exporters such as Nigeria, Colombia and Indonesia are relatively safe, as positive energy balances provide a natural hedge against higher oil prices, supporting both fiscal revenues and external accounts.
A second group of economies falls into an intermediate zone, where vulnerability to a prolonged hydrocarbon market crisis stems mainly from energy dependence rather than broad macroeconomic imbalances. This category includes Chile, China, India, the Philippines, Hungary, Taiwan, Thailand and Turkey. These economies all have structurally negative energy balances and would therefore face pressure on external accounts if prices remain high, but the overall macroeconomic impact will depend on policy space and external buffers. In several cases, relatively manageable current account balances, diversified economies or stronger reserve coverage could soften the shock. Meanwhile, major commodity exporters such as Brazil and Mexico appear structurally resilient despite fiscal deficits, because energy exports cushion the impact of higher prices. Overall, the table highlights that the transmission of a prolonged oil shock to emerging markets would remain highly uneven, with risks concentrated in economies where external imbalances, fiscal constraints and energy dependence overlap.
Table 1. Emerging market exposure, market reactions and coping mechanisms
Sources: LSEG, Allianz Trade Research. Note: Data as of 13 March 2026. Central banks that had been cutting rates before the escalation of the Middle East conflict are highlighted in green.
Turkey and India in particular sit at the intersection of competing blocs—geographically well positioned, politically non-aligned, yet economically interdependent—and therefore risk paying the price of those interdependencies. From a market perspective, both countries continue to run twin deficits (fiscal and current account, in addition to an energy deficit). Last year Turkey posted a primary surplus for the first time since 2022, while India has been running a primary surplus for some time. Turkey’s recent history shows that when energy prices peaked (in 2022, but also during the 2012–2014 cycle), Ankara maintained a positive primary balance—at the cost of higher inflation. This year, the current account is likely to remain negative and could reach 2–2.5% of GDP if energy prices stay high, weighing on the lira and domestic inflation, although some subsidy measures could also be introduced. Fiscal discipline is still being maintained, but the temptation to cushion higher energy prices may grow given a debt-to-GDP ratio of 25%, the continued increase in gold reserves and the ongoing debate about bringing forward the presidential election ahead of its scheduled date in May 2028. India is also in a better position than in 2022, with the fiscal deficit lower than in that period (-0.8% in 2025 versus -2% in 2022) and the external balance at -0.2% of GDP. Although an energy shortage would hurt, India could replace oil and gas imports with greater use of domestic coal, mitigating part of the shock. At the same time, India’s foreign exchange reserves remain very high, covering 11 months of imports.
Are Emerging Markets Facing Higher Energy Prices?
A new escalation of the Middle East conflict could erase the record gains posted by emerging markets. The year 2025 began with a pronounced capital outflow from emerging markets (excluding China), reaching a cumulative low of -USD 10.8bn during President Trump’s “Liberation Day” tariff episode. That proved to be a turning point, however, as market sentiment and dollar weakness turned in favour of emerging markets, restoring capital inflows. As a result, 2025 ended with record portfolio flows of USD 410bn—almost twice the previous year’s level, well above the historical average and a reversal of the post-pandemic capital outflows. Emerging market bond funds ended 2025 with their first annual net inflow since 2021, totalling +USD 31.8bn.
Chart 3: Capital flows into emerging markets, USD bn
Sources: LSEG Workspace, Allianz Trade Research
Looking ahead to the end of 2026, while the emerging markets asset class is structurally stronger, selectivity will be the key investment theme. Direct benchmark exposure to the most vulnerable countries (Egypt, India, the Philippines, Thailand, Turkey) remains limited, as they account for less than 3% of the MSCI Emerging Markets ex-China index. The most vulnerable European economies (Poland and Romania) would indeed feel the effects of higher inflation, but the risk of supply shortages would likely be mitigated by European mechanisms that would probably be reactivated if the conflict lasted longer.
Currency markets reacted quickly to the escalation of the Middle East conflict, with most emerging market currencies weakening during the first week. Between 27 February and 13 March, several currencies suffered sharp declines as higher oil prices and a stronger US dollar triggered a broad risk-off move (Chart 4). The Egyptian pound posted the largest depreciation (-9.2%), reflecting its vulnerability as a major net energy importer with both large fiscal and external deficits. Central European currencies also weakened significantly, with the Hungarian forint (-8%), the Polish zloty (-4.9%) and the Czech koruna (-4.5%) all coming under pressure as the region’s heavy dependence on imported energy combined with investor position unwinding. In Latin America, the Chilean peso (-4.9%) stood out among the worst performers because of the country’s negative energy balance, while in Asia the Philippine peso (-3.6%) and Thai baht (-4.6%) also weakened due to the region’s heavy dependence on Middle Eastern oil supplies. Part of the sell-off reflects the unwinding of earlier investor positions: several currencies that had performed well earlier in the year ended up among the weakest during the latest wave of risk aversion.
As conditions stabilise, currency moves will likely reflect more clearly the differences in each country’s energy exposure. Higher oil prices usually support the currencies of energy exporters while weakening those of importers, suggesting that some Latin American exporter currencies such as the Brazilian real and Colombian peso could stabilise once the initial risk-off correction fades. By contrast, currencies such as the Hungarian forint, South Korean won, South African rand and Chilean peso already appear to be pricing in part of the energy shock and may remain vulnerable to further conflict developments and oil price changes.
Some currencies have remained relatively resilient despite exposure to higher oil prices, especially the Indian rupee and Turkish lira, where active central bank management has helped contain volatility. However, the longer energy prices remain elevated, the harder it may be to maintain that stability. Over the longer term, the duration of disruptions in the Strait of Hormuz will remain the key factor determining continued pressure on FX markets: prolonged disruption would keep energy prices high and strengthen the US dollar, while a quicker resolution would likely allow a partial reversal of the recent weakness in the currencies of the countries discussed here, including Poland.
Chart 4: FX moves since the start of the Middle East conflict
Sources: LSEG Refinitiv, Allianz Trade Research
Despite the ongoing shock, we still view emerging market fundamentals as strong, which partly cushions the impact of the war. Foreign exchange reserves have remained high, as many emerging markets used the conditions of 2025 to rebuild them despite the challenges posed by US tariffs. Central banks in India, South Korea, Taiwan and several Southeast Asian countries rebuilt around USD 132bn of FX reserves in late 2025 and early 2026—more than half of what they had lost during earlier defensive interventions—helped by a weaker dollar and capital inflows. The Reserve Bank of India was particularly aggressive in rebuilding reserves in order to better defend the rupee during periods of weakness.
Chart 5: Foreign exchange reserves rose in most emerging markets over the past year (y/y increase)
Note: International reserves, including gold
Sources: LSEG, Allianz Trade Research
A silver lining in an otherwise difficult situation is that the escalation of the Middle East conflict came at a relatively “favourable” moment for interest rate differentials (emerging markets versus the dollar), as benchmark US Treasuries had already seen a broad decline driven by a structural repricing of fiscal risk premium in the US during 2025. In 2025, real rates improved because inflation in emerging economies slowed faster than nominal rates, allowing central banks to preserve a significant real-rate buffer without undermining currency stability or triggering destructive capital outflows. This parallel setup revealed an overall improvement across emerging markets while also highlighting clear divergences within the group. Turkey, Brazil, Colombia and Nigeria stand out for offering the largest nominal spreads over US Treasuries, although the investment case differs materially across these markets. Turkey, Brazil and Colombia also offer elevated real yields, creating a rare alignment of internal and external value. South Africa, יחד with Mexico, occupies an intermediate position, characterised by elevated differentials and high real yields, albeit less extreme than in Brazil and Colombia. Meanwhile, China, Thailand and Malaysia offer narrow spreads versus the US, suggesting that those markets are supported primarily by domestic investors.
Chart 6: Real rates, interest rate differentials and credit default swaps in selected emerging markets
Sources: LSEG Workspace, Allianz Trade Research
This new geopolitical shock, however, is reviving stagflation fears, with central banks staying on hold because of stronger inflation pressure. Inflation expectations have risen sharply following the rapid increase in prices in the week after the Strait of Hormuz closure—this dynamic is already visible in US Treasury markets, where yields have jumped rather than fallen, because bond markets are pricing this conflict primarily as an inflation shock rather than a growth shock. This puts central banks in a highly uncomfortable position: slowing growth would normally call for rate cuts, but persistent energy-driven inflation prevents them from taking such action. The Fed, which had previously been on a path of gradual easing, may now change course and keep rates unchanged—or even raise them—through the end of 2026. For emerging market central banks—many of which, such as those in Egypt and Turkey, are already navigating fragile disinflation paths—the constraint is even tighter, because currency depreciation pressure amplifies imported inflation, leaving little room to support growth without risking a renewed inflation spiral.
Emerging market sovereign bond spreads have widened slightly, reflecting a more cautious investor mood. The move has been more visible in Africa, the Middle East and Central and Eastern Europe. The sharpest corrections have occurred in the most exposed countries, such as Bahrain and Pakistan, where severe vulnerability to imported energy has amplified market sensitivity. The rest of the Gulf region, by contrast, has remained relatively stable, supported by high oil revenues that partly offset elevated geopolitical risks. This resilience should nevertheless be interpreted cautiously. Historically, spread markets have tended to price geopolitical shocks with a lag, reacting more decisively only once hard economic data begin to reveal their real impact. If the Strait of Hormuz remains closed for more than around four weeks, and supply disruptions begin to show up in macro indicators, a broader and more disorderly widening in emerging market credit spreads—especially among energy-importing countries—cannot be ruled out.
The key question is whether local bond markets are beginning to price inflation risk. Breakeven inflation (BEI)[1] is a real-time market measure of inflation expectations. Because oil prices are a key driver of inflation compensation (Chart 7), higher oil prices should normally push up BEI in emerging markets. Yet before the current shocks, inflation hedging in emerging markets looked unusually cheap. For a representative basket of economies, the average 10-year breakeven stood at just 3.89%, while the historical sensitivity to a 10% increase in oil prices averaged only +8bp in BEI—well below what our simulations suggest for actual inflation. In other words, inflation expectations were still responding to oil prices, but much less strongly than during previous stress episodes. This matters because BEI sensitivity to oil prices typically rises when markets begin to see the shock as more durable and structural. If the conflict proves prolonged, inflation expectations along emerging market yield curves are therefore likely to undergo a much stronger correction.
Chart 7: 10-year market inflation expectations (BEI) in emerging markets (excluding Turkey) vs oil prices
Sources: Bloomberg, LSEG Datastream, Allianz Trade Research.
Notes: Inflation expectations were calculated only for countries with an active inflation-linked bond market. The sample includes Brazil, South Africa, Poland, Mexico, South Korea, Turkey, Chile, Israel and Colombia.
Has this correction already begun? Preliminary data suggest that repricing is underway, but not uniformly. In the first week after the attacks (27 February to 9 March), South Africa saw the largest widening in breakeven curves—+57bp, from 4.32% to 4.89%—consistent with its current account sensitivity and dependence on imported energy. Poland’s breakeven rose by +34bp and Mexico’s by +28bp—significant moves in markets where inflation expectations had been close to, or even below, central bank targets before the shock. The correction, however, was not universal. Colombia’s breakeven fell by 45bp, as markets priced in the benefits of improved terms of trade for a net oil exporter, while Israel’s rose by only +10bp.
Analysing changes in nominal 10-year bond yields helps explain the forces behind the repricing and the extent to which it reflects inflation versus general risk aversion (Chart 8). Chile currently offers the clearest example of inflation-driven repricing: nominal yields rose by 18bp, driven largely by a 33bp widening in breakevens, while real yields fell by 15bp, indicating that the move was entirely tied to higher inflation expectations. In Turkey (+233bp nominally, including +181bp from breakeven) and South Korea (+26bp, of which +20bp came from breakeven), most of the repricing also stemmed from inflation compensation. Mexico, which initially looked almost entirely inflation-driven, has since seen a broader sell-off: nominal yields are now up +49bp, of which +28bp can be attributed to breakevens and +21bp to real yields. This still suggests an inflation-led move, but with a more visible risk-premium component than before. Brazil is a far clearer contrast. Nominal yields rose by +88bp even as breakevens fell by 6bp, implying a +94bp rise in real yields and clearly pointing to higher credit and liquidity premia rather than inflation. South Africa is moving in the same direction. With nominal yields up 96bp, the earlier widening in breakevens has largely reversed to just 22bp, with 74bp explained by higher real yields, suggesting that the move is now mainly about risk aversion rather than the initial repricing of inflation expectations. Colombia (-13bp) remains the exception, where nominal yields continue to reflect market appreciation of better terms of trade for a net oil exporter, while Israel (+14bp) has shifted from a moderate rise to a mild sell-off. In Central and Eastern Europe, the sharpest sell-offs in local rates markets have been recorded in Turkey, Romania and Hungary, with Poland not far behind. Turkey’s move (+233bp)—the most pronounced across all emerging markets—reflects a combination of heavy dependence on imported oil, geographic proximity to the conflict and a market already pricing in fragile disinflation dynamics. Romania (+101bp) overtook Hungary (+94bp) as the second-most affected country in the region: both had benefited from a strong rate rally before the conflict, and the current sell-off is partly a technical correction as investors take profits on stretched long positions, further amplified by the region’s energy sensitivity and the broader repricing across CEE linked to risk aversion and a flight to the dollar. Poland (+83bp) and the Czech Republic (+59bp) complete the picture of broad current weakness in Central and Eastern European local sovereign bond pricing.
Chart 8: Changes in 10-year emerging market bond yields after the outbreak of the conflict: contribution of breakeven inflation and real yields, bp
Source: Bloomberg, LSEG Datastream, Allianz Research. Notes: Yield changes from 27 February 2026 to 13 March 2026.
The outlook for capital flows into emerging markets in 2026 now depends heavily on which scenario materialises. In the case of a short-lived conflict—lasting four to five weeks—capital inflows into emerging markets should remain broadly positive, and markets should return relatively quickly to pre-“Liberation Day” conditions. Investors will, however, become more selective, drawing clearer distinctions between countries based on energy exposure (such as Poland) and inflation vulnerability, rather than treating emerging markets as a single asset class. A prolonged conflict would significantly alter that picture. Capital flows would shift toward safer assets, while the most exposed economies—above all Egypt and Pakistan—would face the strongest outflow pressure, as the combination of currency stress and imported inflation would reshape their risk profiles. In such an environment, pricing would likely take the form of a selective energy risk premium, clearly differentiating exposed sovereign issuers from insulated ones, rather than triggering a broad-based sell-off across all emerging market assets.
This scenario is unfolding against the backdrop of what had until now been an exceptionally strong year for emerging market debt issuance. In hard currency, sovereign bond issuance rose from around USD 72bn in 2022 to approximately USD 236bn in 2025—the highest level on record—reflecting a genuine return of access to international funding markets. Saudi Arabia and Turkey were among the main drivers of this increase, with Turkey alone seeing issuance rise from USD 12bn in 2022 to around USD 31bn in 2025. Poland also made a significant contribution, with issuance rising to about USD 30bn in 2024, while the UAE and Mexico provided further support. At the same time, local currency bond issuance also increased, led by Brazil, Poland and India, with the Czech Republic becoming a particularly notable issuer at USD 195bn—the largest absolute increase during the period—alongside continued support from Thailand and Mexico. The scale of this recovery underlines how much is at stake: a prolonged conflict risks interrupting a multi-year trend of restored financing access for emerging markets just as they had achieved their strongest position in years on the global stage.
Just over two weeks after the conflict began, we are already seeing a mild deterioration in performance among the more exposed sovereign issuers. While the Philippines continues to perform broadly in line with the broader market, Egypt—and especially Turkey and India—have seen more pronounced spread widening. Using the Ukraine conflict as a benchmark, spreads could rise by roughly one-third to one-half of their pre-crisis levels. In practice, this would imply estimated spread widening of around 80bp for Turkey, 35bp for the Philippines, 180bp for Egypt and 35bp for India. It is worth noting, however, that Turkey’s macro-financial situation is now much stronger than it was in early 2022, and the energy risk premia observed during the Ukraine crisis ultimately proved short-lived.
[1] The difference between the yield on nominal bonds and inflation-linked bonds. It shows the level of inflation the market expects. Accordingly, 10-year breakevens are a measure of inflation expectations derived from 10-year bonds.
