Selective economic opportunities emerge amid Iran war risks

• First Capital Research says Mideast tensions could present Sri Lanka with some opportunities
• Oil shock and freight costs to test inflation and external balances
• Moderate conflict could lift Gulf labour demand, supporting remittances
• Shipping diversions may strengthen Colombo’s transshipment role
• Stock market correction may create selective entry points if fundamentals hold

Escalating tensions following the March 2026 Iran conflict pose near-term risks to Sri Lanka’s inflation trajectory, external balances and financial markets, but could also open selective opportunities depending on the duration and intensity of the war, First Capital Research said in a report assessing the immediate and emerging consequences for the economy.

“Ongoing disruptions across Gulf maritime corridors and widespread airspace closures have pushed up freight rates and insurance premiums, increasing the landed cost of Sri Lanka’s imports,” the report noted, warning that higher logistics costs could ripple through domestic prices and export margins.

Brent crude has risen approximately 6–10% since the 28 February–1 March escalation, with international projections indicating prices could reach $ 95–110 per barrel if supply risks through the Strait of Hormuz persist.

 Higher energy prices would feed into transport, fuel and electricity costs, adding short-term inflationary pressure and complicating the Central Bank’s policy calibration as it seeks to balance price stability with growth support.

Nearly a quarter of Sri Lanka’s coffee, tea and spice exports are directed to markets affected by geopolitical tensions, including the United States, Iran, Iraq and the Gulf region. Combined with higher freight and insurance costs, this could weigh on the balance of trade and place downward pressure on the rupee.

The report also highlighted risks to remittance inflows, noting that regional military escalation could disrupt labour markets in Gulf host countries. However, it emphasised that outcomes may differ under a moderate scenario.

“Periods of geopolitical disruption and oil-driven sectoral shifts have historically increased labour demand in certain Gulf markets, potentially benefiting Sri Lankan migrant workers,” First Capital said, citing post-2003 construction booms in Dubai, Qatar and Abu Dhabi as precedent.

Shipping-lane realignments could also create structural advantages. Diversions around the Cape of Good Hope and instability near the Bab-el-Mandeb Strait have increased Indian Ocean traffic flows. If sustained, Colombo could reinforce its position as a mid-Indian Ocean transshipment hub, benefiting port, logistics and maritime-related services.

In currency markets, the US Dollar Index rose to around 99.20 as of 3 March from roughly 97.60 prior to the escalation, reflecting safe-haven demand. The rupee opened weaker but settled largely unchanged at Rs. 309.24 against the dollar, according to the CBSL indicative rate. First Capital maintains a 5% depreciation forecast for the year but cautioned that heightened external pressure and current-account strain could result in a larger adjustment.

Emerging-market Bond yields have also come under pressure as global flows shift towards US Treasuries. Rising oil-linked inflation expectations and concerns over trade disruptions may reduce the likelihood of further domestic rate cuts, adding upward pressure on long-term Sri Lankan yields.

Equities remain exposed to volatility. The Colombo Stock Exchange reopened on 3 March amid heightened uncertainty, with the S&P SL20 declining by over 5% at the open and triggering a temporary trading halt under a directive of the Securities and Exchange Commission of Sri Lanka. The pullback follows a rally of more than 40% in 2025, during which the index traded close to the 24,000 level.

First Capital said that if the conflict remains contained, the correction could present selective entry points, particularly in sectors linked to logistics and external inflows. Conversely, a prolonged escalation accompanied by sustained high energy prices and supply-chain disruptions would weigh on earnings expectations and valuations.

Overall, the report concludes that while immediate external shocks are evident, Sri Lanka’s economic outcome will depend on whether the conflict evolves into a protracted disruption or stabilises under a moderate scenario that limits spill-over and preserves regional economic activity.