Morgan Stanley: Iran Spillovers — From Risks to Resilience
Summaries are public. PDF access requires an active membership; all members have the same access. Sign in
Morgan Stanley observes that emerging market (EM) sovereign credit has absorbed recent Iran-related geopolitical risks well, primarily due to limited overall exposure. However, at the index level, the risk-reward profile will turn more negative if the situation is not clearly resolved within days. The report outlines three scenarios. In a de-escalation scenario, the EMBIG-D index spread narrows to 250 bp. In a managed escalation scenario, spreads widen to 290 bp. In a severe disruption scenario, spreads reach 400 bp.
The firm advises caution on regionally affected credits and key energy importers. High-yield oil importers like Pakistan, Kenya, and Sri Lanka are the worst performers. Conversely, Morgan Stanley favors non-GCC oil exporters such as Argentina, Ecuador, Venezuela, and Pemex. The Middle East and North Africa region is the most impacted among investment-grade credits, followed by Asia and Europe, while Latin America demonstrates greater resilience with weekly spread tightening.
Historically, oil prices are not the primary driver of EM spreads. However, they amplify tail risks during periods of elevated prices. Under the managed escalation scenario, where Brent crude ranges between $75 and $80 per barrel, non-regional oil exporters should benefit. Under the severe disruption scenario, Brent could surge to $120-$130 per barrel, placing significant pressure on high-yield sovereign credit.