The Economic Implications of the Iran War for Latin America

Introduction

On February 28, the United States and Israel launched an offensive against Iran. Conflicting policy signals have raised questions about the potential duration of the war and caused worries that it may last longer than initially expected. An extended war involving the United States and Israel against Iran would have significant economic consequences for the world. 

For Latin America specifically, the effects would arrive mainly through three channels: higher oil prices, slower global economic growth, and shifts in international capital flows driven by rising risk aversion and a stronger U.S. dollar. These channels interact with each other and would affect countries differently depending on their energy balances, export structures, and financial vulnerabilities.

The most plausible negative macroeconomic scenario is one in which geopolitical tensions push oil prices toward roughly $100 per barrel for several months. This scenario has a stagflationary economic impact, raising inflation globally and slowing economic activity. Oil shocks historically raise inflation while reducing growth across many economies because they increase production costs and reduce household purchasing power. 

In Latin America, the resulting economic and political effects would therefore be uneven. Some oil exporters could benefit from higher energy prices, but weaker demand in major global markets—especially China, the United States, and Europe—could offset those gains.

The Oil Price Channel

The most immediate transmission mechanism is through global energy markets. Iran is located near the Strait of Hormuz, through which a large share of the world’s oil supply passes. Even without a direct disruption, the conflict would raise risk premiums and push global oil prices upward.

For oil-exporting countries in Latin America, this would initially generate positive terms-of-trade effects. Brazil, Colombia, Ecuador, and Venezuela would experience stronger export revenues and improved fiscal balances. Research on commodity shocks shows that fiscal revenues in Latin American economies tend to rise when commodity prices increase, although the magnitude varies widely across countries. 

Brazil’s offshore pre-salt production has made it a major oil exporter, and higher prices would boost investment and government royalties, but higher fertilizer prices would offset the benefits. (About a third of global fertilizer materials pass through the Strait of Hormuz during normal operations.) Colombia and Ecuador would also benefit because oil revenues represent a large share of fiscal income, but in the case of Ecuador this is offset by the impact of a stronger U.S. dollar on its dollarized economy. Venezuela would gain from higher prices as well, though sanctions and infrastructure constraints limit its ability to expand production.

For oil-importing economies, however, the effects would be negative. Higher fuel prices would increase transportation and electricity costs and worsen trade balances. Oil-importing economies in Latin America and the Caribbean are especially vulnerable because higher energy costs can significantly weaken their external accounts. 

Mexico occupies a middle ground. Although it exports crude oil, it imports significant volumes of refined fuel. As a result, higher oil prices would raise both export revenues and domestic energy costs. Furthermore, because the Mexican government subsidizes the price of gasoline to the consumer, the fiscal accounts deteriorate with high imported gasoline and diesel prices.

The Global Economic Activity Channel

A second transmission mechanism involves the impact of higher oil prices on global economic growth. Energy price shocks often slow global activity by raising inflation and forcing tighter monetary policy. The extent of the slowdown in Latin America would depend largely on how growth evolves in China, the United States, and Europe, which are the region’s principal external demand sources.

China

China is the most important export market for several South American economies. Brazil exports large quantities of soybeans and iron ore to China, while Chile and Peru rely heavily on copper exports tied to Chinese industrial demand.

If higher energy and fertilizer prices slow Chinese construction and manufacturing, commodity demand would weaken. This would reduce export revenues for Chile and Peru in particular, where copper dominates the export basket. Brazil would also be affected through weaker demand for iron ore and agricultural exports.

United States

The U.S. growth channel is especially important for Mexico and parts of northern Latin America. Mexico’s manufacturing sector is deeply integrated with U.S. supply chains, so any slowdown in U.S. consumption or industrial activity would quickly affect Mexican exports and employment.

Colombia and many Central American economies are also sensitive to U.S. economic conditions through trade, tourism, and remittances.

Europe

Europe is generally a secondary trading partner for Latin America, but it remains important for several countries. Brazil and Uruguay export agricultural and industrial goods to the European Union, meaning weaker European demand could reduce export growth in those economies.

Capital Flows, Risk Aversion, and Dollar Strength

A third transmission channel operates through global financial markets. Major geopolitical conflicts typically trigger a flight to safety, with investors shifting capital toward safe assets such as U.S. Treasury bonds. This process strengthens the U.S. dollar and raises risk premiums for emerging markets.

For Latin America, this dynamic could produce several effects.

First, regional currencies could depreciate against the U.S. dollar. Currency depreciation increases the local price of imported goods, amplifying inflationary pressures already caused by higher oil prices.

Second, borrowing costs could rise. Countries that depend heavily on international financing, such as Argentina, may face higher interest rates or more limited access to global capital markets.

Third, financial markets in the region may experience portfolio outflows. Periods of global risk aversion often generate volatility in Latin American equity and bond markets, tightening domestic financial conditions and slowing investment.

Country-Level Transmission: The Case of Paraguay

Some countries would experience these shocks primarily through regional trade linkages. Paraguay illustrates this dynamic well.

Paraguay imports most of its fuel, meaning higher oil prices would increase production and transportation costs throughout the economy. At the same time, its exports—mainly soybeans, beef, and hydroelectric power—are closely tied to demand from neighboring Brazil and Argentina, and agricultural production is heavily fertilizer-dependent. 

If global economic weakness slows growth in its regional trade partners, Paraguay’s exports would decline despite potentially higher global food prices. The net effect is therefore negative.

Political Implications

Economic shocks of this kind often have political consequences. In oil-exporting countries, higher energy prices may temporarily strengthen government finances and stabilize incumbent administrations. However, reliance on commodity revenues can also increase fiscal volatility and reduce incentives for economic reform.

In oil-importing economies, rising fuel costs and inflation could trigger social tensions or unrest. Energy prices are politically sensitive in many Latin American countries—increased public transportation costs have sparked large-scale protests in Chile, Bolivia, and Brazil in the last 15 years, for example—and governments may respond with subsidies or price controls, which can strain public finances.

Financial volatility and rising borrowing costs could also revive concerns about debt sustainability in some countries, increasing pressure for fiscal tightening.

Conclusion

A U.S.–Israel war with Iran is net negative for Latin America. It would impact the region through several interconnected economic channels. Higher oil prices would benefit energy exporters while hurting importers. It would disrupt fertilizer supply chains, affecting agricultural production. Slower growth in China, the United States, and Europe could weaken demand for many of the region’s commodities. Finally, heightened global risk aversion would strengthen the U.S. dollar and tighten financial conditions across emerging markets.

The result would be a highly uneven regional outcome. Some countries would experience temporary windfalls from higher energy prices, while others would face inflation, financial stress, and weaker growth. In many cases, the political consequences—ranging from fiscal stabilization to social unrest—may be as significant as the economic effects themselves.

Jorge Mariscal, PhD, is a professor at the Columbia University School of International and Public Affairs and a member of the Global Americans International Advisory Council. 

Tulio Vera is a former Managing Director and Chief Investment Strategist at J.P. Morgan Latin America Private Bank. He is a member of the Global Americans Board of Directors and chairs the International Advisory Council. He is the principal author of the report “Preserving the Momentum: Building on Paraguay’s Investment Grade Ratings.”