- The conflict involving Iran is driving higher energy, logistics, and fertilizer costs, with significant implications for growth, inflation, and household welfare across Latin America and the Caribbean.
- However, the region is split: While some economies benefit from higher oil revenues, most face worsening external balances, tighter fiscal constraints, and slower growth.
- Protecting vulnerable households, preserving macroeconomic stability, and strengthening supply-chain and energy resilience will be key to limiting the region’s exposure to future shocks.
The war involving Iran is creating a compound global shock, with deep implications for Latin America and the Caribbean. Rising energy prices, supply chain disruptions, and tightening fertilizer markets are affecting growth, inflation, fiscal balances, and household welfare across the region.
The shock operates through multiple channels at once. Higher energy prices are increasing transportation and production costs. Supply chain disruptions are raising logistics costs and delaying trade flows. Fertilizer markets are under strain, adding pressure to food prices over time. Together, these forces are testing the region’s resilience at a moment when growth remains limited and fiscal space constrained.
To assess the potential scale of these effects, our analysis considers two scenarios. In the baseline scenario, oil prices peak at around $95 per barrel, before gradually easing toward pre-conflict levels over two years. In the stress scenario, prices rise to $120 per barrel and remain elevated for at least four quarters, reflecting a prolonged conflict, continued disruptions to key shipping routes, or persistent uncertainty that delays normalization in energy markets. Both are consistent with historical precedents.
Oil production is a key factor shaping how this shock affects countries in Latin America and the Caribbean.
For net importers of oil, higher energy costs weaken growth and increase fiscal and external pressures. Under a stress scenario, GDP growth could decline by as much as 1.2 percentage points in 2026. Fiscal deficits could widen by between 0.5 and 1.6 percentage points of GDP as import costs rise and governments face pressure to provide relief measures.
Net exporters, by contrast, could see growth increase by up to 1.7 percentage points under the stress scenario, while fiscal balances could improve by as much as 1.8 percentage points of GDP due to higher royalties and oil revenues, as can be seen in Charts 1 and 2.
Terms of trade also deteriorate sharply for oil importers under the stress scenario, by as much as 4.2 percentage points by 2026. In practice, this means countries need to export more to pay for the same volume of imports, reducing purchasing power and increasing external pressures.
Vulnerability also extends beyond direct energy use. Countries that appear less exposed can still be affected through higher costs for imported inputs, transportation, and food production.
Food prices are one of the main ways the shock affects households. Higher energy prices increase transportation, processing, and packaging costs, while rising natural-gas prices also raise fertilizer costs. Over time, an energy shock becomes a food-production shock.
A parallel shock is also unfolding in fertilizer markets, where Iran has historically been an important supplier. A 40% increase in fertilizer prices could lead to sustained increases in food prices, particularly in countries that rely heavily on imported fertilizers.
The effects are likely to be strongest in economies with high dependence on imported food and fertilizers. By month 11 after the shock, the gap in food-price inflation between high- and low-dependence countries approaches 4 percentage points and remains elevated for two years or more, as can be seen in Chart 3.
The effects on poverty are also significant. Starting from a regional moderate poverty rate of 34.64%, the food-price shock alone could push an additional 0.30 percentage points of the population below the moderate poverty line in the baseline scenario, and 0.78 percentage points under the stress scenario. Across Latin America and the Caribbean, this translates into millions of additional people falling into poverty.
The burden is likely to fall hardest on Central American and Caribbean economies, where imported food accounts for a large share of consumption and lower-income households spend a disproportionate share of income on food. As a result, higher food prices can quickly affect household welfare and food security.
Disruptions to global shipping routes are adding another layer of pressure.
Higher logistics costs and delays in trade flows could reduce regional GDP growth by around 0.14 percentage points in the baseline and 0.31 percentage points under the stress scenario, while also adding inflationary pressures (0.27-0.37 percentage points) and fiscal pressures (with deficits widening by 0.11-0.30 percentage points).
Countries that depend heavily on imported intermediate goods are particularly exposed. Central America faces significant vulnerabilities due to its integration into global production chains and reliance on foreign inputs.
The shock has affected countries unevenly and has been less intense in Latin America and the Caribbean than in many other regions. And the region entered this shock with some buffers. So far, financial markets in the region have remained relatively resilient, but downside risks could intensify if disruptions persist.
On international reserves, most countries are in better shape than in previous decades, with reserve levels remaining above IMF adequacy metrics. This provides an important cushion against external pressures, while reducing the risk of disorderly balance-of-payments adjustments.
At the same time, this global shock is significant and not short-lived. Debt levels are higher and fiscal space is more limited. Several countries continue to face elevated debt levels and high interest burdens, limiting room for broad subsidies, large-scale transfers, or additional public investment. As in previous shocks, countries with weaker fiscal positions are likely to face more difficult tradeoffs, with adjustment costs falling hardest on vulnerable households.
On the positive side, the region’s energy supply mix is more diversified than decades ago, with greater reliance on hydro, wind, and solar. However, some Caribbean and Central American economies remain heavily dependent on oil for electricity generation and are therefore more exposed to rising energy prices.
The policy choices made now will determine how the shock is absorbed at the macroeconomic level and how much it may affect the most vulnerable in the region.
Three policy priorities stand out:
1. Protect Vulnerable Households
The response should rely on targeted support focused on households most affected by rising food and energy prices.
Well-designed cash transfer systems and automatic stabilizers can help cushion the impact quickly and efficiently. Countries with stronger social protection systems will be better positioned to protect purchasing power without creating large fiscal distortions.
2. Maintain Fiscal Discipline
The shock is too large for public budgets to absorb.
Broad subsidies and poorly targeted emergency measures can weaken fiscal positions, distort incentives, and become difficult to reverse. As governments face pressure to act quickly, the objective should be clear: support vulnerable households while preserving macroeconomic stability.
Countries with stronger fiscal buffers and reserve positions are better placed to respond without undermining confidence or long-term growth.
3. Strengthen Supply and Resilience
This is not a one-off shock. Shocks like this are becoming more frequent and complex. Reducing vulnerability requires structural action.
Diversifying energy sources, strengthening regional supply chains, and expanding local and regional fertilizer production and improving logistics are essential to reducing future exposure to external shocks.
At the same time, the region has an opportunity to position itself as a safe and reliable supply-chain partner in global markets—from agriculture to critical minerals. Moving up the value chain can support growth, strengthen resilience, and create jobs.
The conflict involving Iran comes at a time when many countries in the region are still rebuilding fiscal and social buffers after the COVID-19 pandemic, while inflation has only recently started to moderate.
At the same time, Latin America and the Caribbean enter this shock from a stronger macroeconomic position than in previous decades. Reserve levels are generally stronger, the region’s energy matrix is more diversified, and financial markets have remained relatively resilient so far.
Even so, the effects of the shock are likely to remain uneven across countries, depending on oil production, dependence on food and fertilizer imports, and available fiscal space.
This means that the response cannot follow a single regional template. Countries will require targeted measures that protect vulnerable households, preserve macroeconomic stability, and reduce structural vulnerabilities over time.