Emerging markets no longer fear oil
17 JUL, 2026
Patrick Zweifel, Chief Economist at Pictet AM
Historically, higher oil prices worsen the trade terms of oil-importing countries, generate inflation, erode real household incomes, and ultimately affect growth. Central banks become more aggressive, risk assets suffer, and emerging markets are often among the first victims, given their sensitivity to increased risk aversion. In addition, in the 90s and early 2000s, many emerging economies had large current account deficits, considerable dollar debt, and limited foreign exchange reserves. An oil shock was often enough to trigger serious financial crises. Today, reserves are larger, external debt is lower, current account positions are stronger, and central banks are more credible. Vulnerabilities have not disappeared, but they are materially less.
Of course, the oil shock is inflationary and negative for growth. But its effects are cushioned. As in the last 50 years, financial markets, at least initially, have reacted to rising oil prices with falling stocks, rising bond yields, weakening of energy-importing countries' currencies, and selling of emerging market assets. But this time the traditional scenario has been more fleeting.
Much stronger fundamentals
Currently, emerging economies face the oil shock with much stronger fundamentals than in previous decades, favored by the boom in technology industries, solid fundamentals, and less dependence on the dollar. Inflation in emerging markets, in contrast to other oil peaks, was surprisingly moderate.
This explains why, despite high oil prices, emerging market assets remain in one of their most favorable environments since the early 2000s. The value of local currency debt in emerging markets has fallen almost twice as much as that of developed markets, but it has recovered and the hard currency debt of emerging markets has been more resilient, with a smaller initial drop and a stronger rebound.
AI and energy transition favor emerging markets
It should be noted that the world's largest economies are investing in large volumes. In the U.S., despite weaker consumption, investment related to artificial intelligence (AI) is growing almost 25% year-on-year and its imports of capital goods by more than 20%. China, deeply involved in the AI race, continues to expand imports. Germany is also investing in infrastructure, defense, and energy transition.
Moreover, the energy transition favors raw material producers.
All this spending generates strong demand for exports from emerging economies. The result is that, while in 2022, when oil prices soared after the Russian invasion of Ukraine, Korea's trade balance deteriorated almost 2.5% of GDP, this year it has improved more than 5% in just two months. This is due to the price of semiconductors and demand for data centers and AI infrastructure more than offsetting the increase in energy costs. Taiwan's trade surplus has also increased, in contrast to the deterioration in the previous oil shock. In addition, the development of digital infrastructure and electrification of the global economy drives demand for materials that these economies extract and refine. Industrial metal prices have risen more than 40% in the last year and Chile, Peru, Mongolia, and Zambia benefit from copper, Kazakhstan from uranium, and Indonesia from nickel. It also benefits Brazil, Malaysia, and India.
The waning power of the dollar
It should also be noted that previous oil shocks were amplified in economies with dollar debt, due to the strong appreciation of the dollar. But the dollar, although overwhelmingly dominant as a currency of payments and intermediation, has only appreciated 1.2% between February and May, compared to almost 6% in the 2022 oil shock. In addition, the currencies of emerging market dollar debtors have depreciated 2.3%, less than a quarter than in 2022. Overall, the dollar's ability to amplify economic shocks decreases as the central banks' reserves of these economies diversify and their local financial markets develop. De-dollarization reduces part of the financial amplification mechanism
In previous clashes, higher energy prices resulted in slower growth in Central and Eastern Europe. But today, German fiscal expansion, increased defense spending, and large infrastructure investment create a regional growth engine that was not seen before. Thus, the Polish zloty, the Czech crown, and the Hungarian forint have held up much better than in similar episodes.
This lower pressure on emerging market currencies limits the inflationary impact. In 23 of these economies, inflation has increased an average of 1.2% in 2026 until May, compared to 3.2% in 2022.
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