Analysts caution that the war in Iran and the consequent surge in energy prices will have far-reaching effects on emerging markets, extending beyond inflation to exert broader pressures on external balances, currencies, and capital flows.

Major brokerages, such as J.P. Morgan and Bernstein, anticipate that Brent prices could surpass the $100 threshold if the conflict persists. Tehran's threat to block the Strait of Hormuz and its warning to target any vessel attempting to navigate this vital oil and gas shipping route are exacerbating the situation.

Brent crude futures surged by $5.63, or 7.2%, reaching $83.36 per barrel by 1254 GMT and hitting their highest level since July 2024 at $85.12.

"A mere 10% hike in oil prices could erode current account balances (of emerging markets) by 40-60 basis points. Prolonged price escalations would only worsen these deficits," noted analysts at ING, highlighting that Thailand, South Korea, Vietnam, Taiwan, and the Philippines are particularly vulnerable.

The US and Israeli airstrikes against Iran have widened, with Israel striking Lebanon and Iran retaliating by targeting energy infrastructure in Gulf nations and attacking tankers in the Strait of Hormuz.

The global financial markets have been shaken by the conflict, leading to declines in both emerging market equities and currency indexes to three-week lows as investors seek refuge in the US dollar.

Although higher crude prices present only a limited risk to China unless the shock persists or intensifies significantly, India, with its meager oil reserves, would face significant exposure to a sustained disruption in supply, analysts pointed out.

Goldman Sachs projects that a supply-induced jump in Brent crude prices from $70 to $85 would contribute about 0.7 percentage points to inflation across emerging Asia and shave off approximately 0.5 points from economic growth, exacerbating current account deficits across nearly every economy in the region, especially in Thailand, Singapore, and South Korea.

Citigroup cautioned that an extended oil price shock could "aggressively de-anchor" inflation expectations in emerging markets, with low-reserve countries like Argentina, Sri Lanka, Pakistan, and Turkey facing heightened risks of capital flight and currency devaluation.

On a separate note, J.P. Morgan analysts adjusted their stance on EMEA emerging market foreign exchange to "marketweight" and labeled Poland's zloty as an "underweight" currency on Tuesday.