Why the Strait of Hormuz Reopening Doesn’t Signal Full Economic Relief

The Strait of Hormuz, a narrow waterway through which roughly a significant portion of the world’s oil passes daily, was a focal point of geopolitical tensions earlier this year as conflicts in the Middle East escalated. While the reopening of the strait has stabilized oil prices—currently trading at $82 per barrel (Brent crude)—Smets cautioned that the broader economic landscape remains fragile.

“The reopening of the Strait of Hormuz has reduced immediate risks to energy markets, but it does not address the underlying pressures,” Smets told reporters during a recent briefing. “Inflation remains sticky in many economies, central banks are walking a tightrope between fighting inflation and avoiding a recession, and sovereign debt levels—particularly in emerging markets—are at historically high levels.”

According to the International Monetary Fund (IMF), global public debt reached 93% of global GDP in 2023, with emerging markets accounting for nearly half of that total. Smets highlighted that countries reliant on oil exports—such as those in the Gulf Cooperation Council (GCC)—face a double challenge: declining revenues due to lower oil prices and rising debt servicing costs.

Key Statistic: The IMF projects that a number of emerging markets are at risk of debt distress, with Egypt, Pakistan, and Ghana among the most vulnerable. Smets noted that these countries are particularly exposed to shifts in global liquidity, which could trigger capital flight or currency crises.

Stablecoins as a Double-Edged Sword in Financial Stability

Another area of concern for Smets is the rapid growth of stablecoins—digital assets pegged to fiat currencies—as a means of payment and store of value. While stablecoins like USDC and Tether (USDT) have gained traction in regions with unstable currencies, Smets warned of their potential to exacerbate financial instability.

“Stablecoins are being used as a hedge against inflation and currency devaluation, particularly in countries where traditional banking systems are weak,” Smets said. “However, their rapid adoption without robust regulatory frameworks poses risks. A sudden loss of confidence in these assets could lead to a liquidity crunch, similar to what we saw with the collapse of TerraUSD in 2022.”

The BIS estimates that stablecoin transactions now account for a substantial and growing volume annually, with the majority occurring in emerging markets. Smets pointed to Financial Stability Board (FSB) reports indicating that a significant portion of stablecoin activity is concentrated in regions with high inflation or currency volatility.

Comparison: While stablecoins offer a lifeline for individuals in economies like Argentina or Nigeria, where inflation exceeds 200% annually, their lack of central bank backing means they are not a true substitute for sovereign money. Smets cautioned that if stablecoin issuers face liquidity shortages—such as what happened with Circle’s USDC during the 2022 crypto winter—it could trigger a broader financial contagion.

Geopolitical Tensions: The Lingering Threat to Global Markets

Despite the easing of tensions in the Strait of Hormuz, Smets emphasized that geopolitical risks remain elevated. The conflict in the Red Sea, ongoing tensions in Ukraine, and the potential for further escalation in the Middle East continue to disrupt global supply chains and trade flows.

“The reopening of the Strait of Hormuz is a positive development, but it is not a panacea,” Smets stated. “Geopolitical risks are not confined to one region. The war in Ukraine has already led to a significant increase in food prices in some African nations, and the diversion of shipping routes around the Cape of Good Hope has added substantial costs annually to global logistics costs, according to the United Nations Conference on Trade and Development (UNCTAD).”

Smets also highlighted the considerable amount of outstanding sovereign debt held by emerging markets, much of which is denominated in U.S. dollars. This creates a mismatch risk: if the U.S. Federal Reserve continues to raise interest rates—or even maintains them at elevated levels—the cost of servicing this debt could become unsustainable for vulnerable economies.

Historical Context: The last time global debt levels were this high relative to GDP was in 1946, in the aftermath of World War II. At that time, debt defaults and currency crises were widespread. Smets drew parallels, noting that today’s debt levels are even higher when adjusted for inflation.

What This Means for Investors and Central Banks

For investors, Smets’ warnings suggest a continued environment of volatility. The BIS has signaled that central banks may need to adopt a more cautious approach to monetary policy, balancing the need to combat inflation with the risk of triggering a recession.

“Central banks are in a tough spot,” Smets explained. “If they cut rates too soon, inflation could resurface. If they keep rates high for too long, they risk pushing economies into recession—especially in emerging markets where debt levels are already stretched.”

Smets also advised investors to monitor three key indicators:

• Sovereign debt spreads: The gap between yields on emerging market bonds and U.S. Treasuries has widened to 450 basis points in some cases, signaling heightened risk.
• Stablecoin adoption rates: A surge in stablecoin usage in high-inflation economies could indicate growing distrust in local currencies.
• Commodity price volatility: Oil prices remain sensitive to geopolitical developments, and any new disruptions in the Middle East could send shockwaves through global markets.

How to Follow the Latest Developments

For real-time updates on economic risks, including sovereign debt trends, stablecoin activity, and geopolitical developments, readers can monitor the following sources:

• Bank for International Settlements (BIS) Reports – Official assessments on global financial stability.
• IMF World Economic Outlook – Quarterly analysis of global economic trends.
• Financial Stability Board (FSB) Reports – Oversight of stablecoin and crypto risks.
• UNCTAD Trade and Development Reports – Impact of geopolitical tensions on global trade.

The next major economic data points to watch include:

• June 17: U.S. Consumer Price Index (CPI) – A key indicator for Federal Reserve policy decisions.
• June 20: IMF Spring Meetings – Updates on global debt sustainability.
• June 24: BIS Quarterly Review – Insights on stablecoin and financial stability risks.