Financial officials from around the world are gathering in Thailand this week as the Middle East war expands, amid what is described as the largest-ever shock to energy supplies and rising interest rates. Together, these factors pose serious risks to global economic growth, which is already slowing.
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The US-Israeli war against Iran, now in its eighth month, and the inflation and cost-of-living pressures it has caused are expected to dominate the agenda and side discussions at the annual meetings of the International Monetary Fund and World Bank, being held outside Washington for the first time in three years.
Among the most notable absentees will be US Treasury Secretary Scott Bessent, who has delegated two senior officials to represent him while he attends to what a US official described as "domestic engagements."
Bessent's decision to skip the high-profile gathering and a Group of 20 meeting, which the United States is chairing this year, could anger his counterparts as tensions rise over the war in Iran, the Russia-Ukraine war and the US decision to impose sanctions on the International Criminal Court.
World Bank President Ajay Banga told Reuters that while global growth had held up better than expected when Iran closed the Strait of Hormuz, disrupting about 20% of global oil supplies, pressures were beginning to build again.
He said sharp increases in diesel and fertilizer prices were occurring at the same time as an expected severe El Niño phenomenon, which experts say could result in 450,000 deaths due to extreme heat.
The Group of Seven countries agreed to release 100 million barrels of emergency diesel and crude oil reserves under pressure from US President Donald Trump, who is seeking to lower gasoline prices ahead of the November elections, in which his Republican Party could lose control of Congress.
Trump announced on Friday that he had reached an agreement with Russia that would bring more diesel onto global markets, along with a temporary exemption from US sanctions intended to deprive Moscow of revenues used to finance its war in Ukraine. The move was swiftly criticized by Ukrainian President Volodymyr Zelenskyy.
Since the war began on February 28, more than 1 billion barrels of oil have been withdrawn, most of it from onshore commercial inventories. Energy executives, however, say the amount of stored oil actually available to global markets is beginning to decline, making the market more vulnerable and adding to price pressures.
Banga said the World Bank was not currently planning to cut its global growth forecast, but was closely monitoring developments.
"The real issue is not El Niño alone, but the combination of factors... What happens to fertilizer prices? What happens to energy costs? What happens to debt? It is the combination of these factors that creates its own challenges. I think this will require all of us to be more cautious about what we prepare for in the coming months," he said.
Rising Debt
IMF Managing Director Kristalina Georgieva issued a similar warning in her opening remarks ahead of the meetings, telling attendees: "Winter is coming."
The IMF is not expecting a significant change to its forecast for global economic growth of 3% in 2026 and may slightly raise its projection for next year.
However, growth forecasts are expected to be lowered for some countries, including Ukraine, which has entered the fifth year of its war against Russia, and Gulf states affected by Iranian strikes and a sharp decline in energy exports.
Research released by the IMF on Tuesday showed that sharp increases in food and energy prices are becoming an increasingly common source of crises, pushing inflation expectations higher for longer periods, worsening poverty and threatening economic stability.
The growing burden of public debt is one of the biggest challenges facing policymakers, weighing on economic growth and increasing inflationary pressures. The IMF says public debt has reached its highest level since World War II and will exceed 100% of global GDP before 2030.
Advanced economies, led by the United States, have the highest debt-to-GDP ratios. Emerging markets and low-income countries, however, remain the most vulnerable as they face a combination of challenges, including capital outflows in search of higher returns in the United States, the effects of El Niño and weak investment in artificial intelligence technologies, which have helped mitigate the impact of negative supply shocks in the United States and other wealthy countries.
Emerging Market Concerns
Developing countries are particularly vulnerable because of high levels of public debt that will have to be refinanced at higher interest rates.
Interest payments already account for more than 10% of revenues in developing countries on average.
During the early stages of the COVID-19 crisis, G20 leaders announced a suspension of debt-service payments for the poorest countries. Diplomats from G20 nations, however, said there is currently little enthusiasm for taking a similar step, as high debt levels and political pressures present greater obstacles this time.
Many low-income countries are concerned about new recommendations from the IMF regarding lending programs, which call for fewer but deeper reforms as a condition for approving loans. Many fear the change could lead to painful austerity measures.
Yolanda Fresnillo, who works on debt justice at the Eurodad network, said: "Countries are already cutting their spending because of higher debt payments and because of IMF conditions... We fear that this review of the conditions could make the situation worse."
She said Kenya had avoided restructuring its debt by cutting public spending and attempting to raise taxes, but the changes triggered widespread protests, particularly among young people.
She said the IMF risks losing credibility unless it acknowledges the scale of the crisis facing many developing countries.
"As long as it continues to operate under the current governance structure, it will become less relevant and influential over time," she said.
Security and Economics
Many flights to Bangkok pass through the Middle East, creating direct security challenges for more than 10,000 participants traveling to the Thai capital, which is home to around nine million people, following the latest attacks on several Saudi airports.
Morocco hosted the most recent annual meetings of the IMF and World Bank outside their headquarters.
Josh Lipsky, deputy director of international economics at the Atlantic Council, said that after three years, the link between national security and international finance had become clear, despite financial officials at the time dismissing the Hamas attack as an issue with economic implications.
"The global repercussions were clearly enormous... What we are seeing now with Iran and the closure of the Strait of Hormuz is directly linked to what happened three years ago," Lipsky said.
He added that policymakers need greater flexibility in responding to geopolitical crises in an increasingly interconnected world.
"They need to act proactively and recognize that they no longer live in the world they were accustomed to," he said.
Source: Reuters
