Policymakers, scarred by post-COVID inflation, risk tightening monetary policy excessively in response to energy price surges. History suggests these shocks are temporary and primarily affect headline, not core, inflation. The greater danger is stifling economic growth by overreacting to a transient inflationary impulse.
When assessing risk in energy-importing emerging markets, the crucial factor isn't just the level of imports. The key differentiator is the country's available "policy space"—its fiscal buffers and access to alternative financing—which determines its ability to absorb an energy price shock.
Latin American economies are positioned to benefit from the Iran conflict. The region is not only geographically removed from the turmoil but also features large commodity exporters that gain from price increases. Furthermore, a political realignment with the U.S. is enhancing its strategic and economic appeal for investors.
At the IMF meetings, investors showed surprisingly upbeat sentiment towards Emerging Markets (EM), despite the Iran conflict. This suggests markets have already priced in a high probability of de-escalation and have strong confidence in EM policymakers' credibility, creating a potential disconnect between market mood and actual geopolitical realities.