War in Iran: how energy is influencing Latin America's economy

The Iran-Saudi Conflict and Its Impact on the Global Energy Market

When Russia launched its large-scale invasion of Ukraine in February 2022, the resulting disruption of energy and commodity markets sent a shock through the global economy. This year, the war in Iran has triggered another energy shock that is rippling out from the closure of the Strait of Hormuz, which normally carries about one-fifth of the world's supply of oil and natural gas. As in 2022, Latin America and the Caribbean are facing a complex economic landscape due to the conflict.

The current edition of "Economic Pulse of the Americas" analyzes what past energy shocks and recent data reveal about how the war in Iran might influence the region's economic path.

Energy Scarcity, Higher Prices, Slower Growth

Inflation expectations are already rising across the region. As shown in the chart in the original analysis, the International Monetary Fund's April 2026 Consumer Price Index projections indicate higher inflation than the October forecast. This change is not surprising. A similar pattern emerged after Russia's invasion of Ukraine in 2022.

As shown in the second chart of the original analysis, actual inflation for Latin America and the Caribbean that year turned out to be significantly higher for most countries than the pre-invasion October 2021 projections, reflecting a broader global pattern.

Inflation and Economic Pressures

With rising energy prices in 2022, further pressures followed. Limited access to fuel and fertilizers (many of which are byproducts of natural gas production) led to higher food prices, which slowed growth by increasing the cost of imports and production inputs. Some net exporters of energy and agriculture benefited from higher export prices, but economies across the hemisphere still faced inflationary pressures.

The chart in the original analysis compares inflation trends over the past four years among Latin American and Caribbean economies, presented as a GDP-weighted regional average (excluding selected high-inflation countries). In 2022, both inflation and energy prices rose in sync. Pandemic-related stimulus spending and supply chain disruptions contributed, but the energy shock extended the inflation cycle, forcing central banks to keep interest rates higher for longer to curb inflation. Higher interest rates tend to slow growth, encouraging capital to shift from consumption and investment to higher-yielding financial instruments.

Impacts on the Regional Economy

Inflationary pressures are already rising. In Chile, historically a fuel importer, regulators have been forced to raise gas prices by up to 54% in March. Other countries, such as Bolivia, Colombia, and Ecuador, are facing rising fuel subsidy costs, putting pressure on government finances. In Brazil, a large energy exporter that still imports most of its diesel, the government has responded by eliminating federal taxes on diesel and increasing tariffs on exports of crude oil and diesel to discourage outbound shipments.

Financial Impacts and Opportunities

The financial reverberations of the conflict are also affecting the region. Ten-year government bond yields have risen among advanced and emerging economies, including Mexico. In Latin America and the Caribbean, higher yields translate into higher borrowing costs and renewed inflationary pressure.

If this trend intensifies, countries with significant short-term external debts, often denominated in foreign currency, will face growing pressures. These obligations become harder to renew as interest premiums rise, meaning that short-term relief can create medium-term vulnerabilities. While levels of foreign currency reserves vary in the region, countries with lower credit ratings, higher short-term debt burdens, and weaker reserves are more exposed to financial stress.

Crises also bring opportunities. Although the duration and magnitude of the Iranian conflict remain uncertain, several trends are clear: energy and commodity shortages are pushing inflation higher, tightening financial conditions, and slowing growth. Import-dependent economies in Latin America and the Caribbean generally face the greatest risks in the Western Hemisphere.

However, the crisis also creates opportunities. Countries in the region can attract investments in energy sectors that reduce dependence on concentrated supply chains. Argentina, Brazil, and Guyana are important examples. Others can follow countries like Chile by accelerating investments in renewable energy to reduce dependence on energy imports.