The reaction to the latest oil price shock provides further evidence that those countries which have taken steps to strengthen their financial position are being rewarded by bond investors.
Read this article to understand:
- Why EM bond markets’ reaction to events in the Middle East has been far from uniform.
- Why investors seem to be getting more discerning, separating winners from losers within EM.
- How financial resilience is being rewarded.
For decades, oil price spikes have been synonymous with stress within emerging-market (EM) bonds. Higher current-account deficits, inflation surprises, worsening fiscal positions and monetary policy mistakes tended to be the default transmission mechanism.
Historically, investors began by considering a country’s exposure to higher oil prices – whether it was an exporter or an importer – and the expected impact on its current-account. However, the old playbook is no longer an appropriate lens with which to try to separate winners from losers.
The reaction to the recent surge in oil prices has been far from uniform, unlike in 2022, when emerging-market debt issued by oil importers was sold off en masse in response to Russia’s invasion of Ukraine.
This time, exposure to the impact of higher oil prices has not been the only factor separating winners from losers. Markets are also looking closely at other factors such as the size of a country’s foreign-exchange (FX) reserves, its current account position and dependence on foreign capital to finance its debt, whether it subsidises petrol prices and the extent to which this might impact its fiscal position.
It appears investors are distinguishing between those nations that have strengthened their macroeconomic position since 2022 by building up buffers, and are viewed as likely to be able to withstand and manage the shock, and others that remain more vulnerable.
Figure 1 provides a rough gauge of individual countries’ vulnerability to higher oil prices by plotting net oil export/import balances as a percentage of GDP against import cover - the extent to which imports are covered by foreign-exchange reserves.
Figure 1: FX buffers build resilience
Source: Aviva Investors, Fitch and MacroBond, as at March 30, 2026
Fundamentals across many EMs have improved meaningfully since 2022. A number of countries entered this shock having built up FX reserves, with lower deficits and critically, fewer energy subsidies.
In Figure 2, we attempt to compare individual countries’ sensitivity to recent events – due to both the impact of higher oil prices and trade links with the Gulf Cooperation Countries – against a simple proprietary measure of external resilience. This latter measure takes account of various factors including FX reserve buffers and debt payments coming due.
Unsurprisingly, oil exporters with limited transit risk and improved fiscal discipline screen well. Oman and Angola are outright beneficiaries. Oman benefits not just from higher oil prices, but its location which means it does need access to the Strait of Hormuz to export its goods. As for Angola, with an oil price at US $100 it can run sizeable current account and fiscal surpluses, rebuilding buffers rather than consuming them.
Figure 2: Resilience to higher oil prices
Source: Aviva Investors, Fitch and MacroBond as at March 30 2026.
While it is possible to quicky calculate the impact of higher oil prices on a country’s current account and other economic metrics, policy responses are less straightforward to assess.
The removal of fuel subsidies has in a number of cases reduced the immediate fiscal hit from higher oil prices, even if it will increase the speed at which inflation begins to be impacted. Managing these trade‑off sits at the heart of today’s EM policy challenge.
Investors should watch closely to see how governments balance the need to provide temporary protection against higher fuel prices, against fiscal space. For example, South Africa which has worked hard to cut its budget deficit, has temporarily cut its fuel levy.
Nigeria is in a better position compared with past cycles. Higher oil prices should finally translate into an improved fiscal position with fuel subsidies removed, so long as the government holds firm and does not reintroduce them. History suggests this is far from certain.
Kazakhstan also screens well in a scenario of sustained high oil prices, benefiting from export revenues and a manageable rise in inflation.
As for local currency bond markets, several Latin American countries emerge as relative winners notwithstanding the risk of higher inflation. Short-dated interest rates in Brazil, Mexico, Colombia, and Peru, as well as South Africa, have already risen to such an extent that yields now more than compensate for higher inflation should oil prices hold at US $100 barrel.
This is an important shift from previous oil price shocks, when EM central banks were often slow to hike interest rates. The market appears to have moved faster than the inflation maths alone would justify, creating pockets of opportunity rather than blanket risk.
Losers are no longer just oil importers
The more interesting story sits with the losers. Vulnerability today is less about oil dependence and more about policy credibility, financing access and political timing.
Bahrain sits at one extreme. Low levels of foreign-exchange reserves, debt levels that are among the highest globally, and external financing requirements, combined with high exposure to other economies in the region, make the country vulnerable.
Worse still, the majority of Bahrain’s trade goes through the Straits of Hormuz. While Saudi Arabia may provide support if the conflict persists, Bahrain’s failure to consolidate public finances following the Saudi-led fiscal support package of 2018 may lead to tougher negotiations this time around.
Kenya too has lagged peers on fiscal consolidation efforts, leaving elevated funding requirements. While, improved foreign-exchange reserves provide a near-term buffer, Kenyan bonds remain vulnerable to these buffers being drawn down sharply.
By contrast, Sri Lanka looks better placed to weather the storm. A few years ago, Sri Lanka would have been regarded as especially vulnerable to higher oil prices. But while it remains a big oil importer and dependent on the Middle East economies, its FX reserves have been rebuilt and fiscal consolidation continues.
The country is also benefiting from an IMF program, which proved crucial in providing quick funding following last year’s devastating flooding.
Second and third‑order effects matter more
Working out the first‑order impact of an oil price shock is comparatively easy. The harder part is assessing knock-on impacts including inflation volatility, countries’ ability to access external bond markets and shifts in investors’ perception of risk.
Argentina is a reminder of the danger that structural fragility overwhelms commodity tailwinds. While higher oil prices should help the nation over time as oil production rises, the near‑term macroeconomic outlook is fraught with danger. Higher inflation and weaker economic growth could be destabilising, and push bond prices lower.
Adjusting to external shocks, often involves a balancing act such as deciding when to use foreign exchange reserves to support a currency. While there is an obvious danger that reserves are drawn down too rapidly, equally allowing the exchange rate to depreciate unchecked could leave policy makers with a larger inflation shock.
This is where resilience has genuinely changed. The ability to fine‑tune responses, rather than revert to blunt tools, marks a clear evolution in EM policy frameworks.
Egypt and Turkey are two examples of countries that have in recent weeks taken a more orthodox approach. Egypt, is opting to allow its exchange rate to weaken, and preserve reserves, a move that will be supported by the IMF.
In contrast, Turkish authorities have built up sizeable buffers, affording them the opportunity to use the reserves to smooth the path of the FX adjustment. If oil prices remain elevated for an extended period, the market will closely watch how they manage the trade-off.
A more mature EM complex
Stronger balance sheets, credible monetary frameworks and reduced fiscal rigidities mean that shocks are increasingly absorbed rather than amplified.
That does not mean complacency is warranted. Political cycles, subsidy reversals and financing constraints can still derail even improved fundamentals. But the reflexive EM crisis narrative feels increasingly outdated. Oil may still matter, but resilience is increasingly important.
