The IMF is warning that emerging markets are facing a double hit from the Iran war: more volatile capital and a faster pass-through into higher borrowing costs and weaker currencies. The shift is partly structural. A cumulative $4tn flowed into emerging markets last year from outside the formal banking system, including hedge funds and investment funds, and those investors tend to pull back faster when global risk rises.
That leaves central banks and finance ministries in a tighter spot. The IMF says hedge funds and mutual funds have the highest propensity to withdraw in stress periods, while pension funds and insurers are more patient. In practice, that can mean abrupt capital retrenchments, higher external financing pressure, sharp currency depreciation and, ultimately, slower growth. The Fund says some of those strains are already visible as nonresident nonbank investors reverse flows in several emerging markets tied to the war in the Middle East.
The warning lands just as policymakers prepare for next week’s spring meetings in Washington, where the conflict’s economic fallout is likely to dominate. IMF Managing Director Kristalina Georgieva said on Monday that the war points to “higher prices and slower growth,” even if fighting stopped immediately. That is a grim setup for borrowers already paying up for dollar funding and for governments trying to keep currencies steady while fuel prices climb.
The Fund is also flagging two more channels that could amplify the pressure: stablecoins flowing into some emerging economies, which can swing with crypto markets, and private credit, a largely opaque form of direct lending that the IMF says has expanded fivefold over the past decade to perhaps $50 billion to $100 billion. Regulators are being told to watch the plumbing, not just the headlines.
