Emerging markets encompass regions with significantly diverging fundamentals and a broad range of credit challenges—from persistent inflation and tightening financing conditions to sluggish domestic demand and geopolitical tensions.
Emerging and frontier markets are strategically positioned to drive global economic growth through the expansion of their domestic markets.
Emerging and frontier markets will play a crucial role in shaping the global economy and driving growth, contributing approximately 65% of global economic growth by 2035. Frontier markets will play a prominent role in this growth due to their favorable demographics—but face significant challenges from persistently high inflation and political uncertainty.
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The bilateral reduction in tariffs between the U.S. and China provides near-term relief for emerging markets (EM). The associated reduction in risk aversion and volatility improves the financial markets backdrop for EM issuers. However, despite this tariff climbdown, there is still significant uncertainty over U.S. trade policy, as bilateral tariff negotiations with other countries continue. This uncertainty alone could continue to hold back investment across EMs.
Brent crude price fell $15/bbl year to date 2025 amid demand concerns and rising OPEC+ output. S&P Global Ratings revised its oil price forecast down by $5/bbl. Lower oil prices, along with a weakening U.S. dollar, may support disinflation in most EMs, as their currencies have generally appreciated year to date.
EM benchmarks mildened in April, while corporate yields increased, more pronouncedly among the speculative-grade rated entities. Corporate spreads recorded an abrupt widening in the first week after April 2 announcements and retrenched mildly during the following ones. The tariff turmoil hit market activity outside China, which more than halved with respect to last month. Greater China's monthly bond issuance rose by 22%, particularly among financial institutions and utilities.
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Global financial institutions are facing increased market volatility, which heightens counterparty risk and could expose vulnerabilities across financial systems.
Escalating trade tensions may undermine business and consumer confidence, reducing corporate investment, credit demand, and potentially, banks' profits.
We expect Mexican banks to take cautious growth strategies due to uncertainties over U.S. tariffs. Credit expansion may slow, and asset quality could decline but remain manageable.
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While many emerging markets were among the first adopters of international regulations on capital and liquidity, most of them are still dragging on the implementation of a resolution regime.
As members of the G20, Saudi Arabia, South Africa, and Turkiye have endorsed the resolution standards but only South Africa made it to the finish line.
Reluctance to adopt resolution regimes could be due to concerns that it would undermine confidence in government support for banks. It could also be due to the narrow local capital markets and limited access to international capital markets and the higher costs for banks. Finally, it could be simply related to the low sophistication of the institutional frameworks in many emerging markets.
We therefore expect adoption of resolution regimes in many of EMEA's emerging market countries will take a long time.
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We now see even more potential downside to China banks due to the trade conflict with the U.S. Strains will incrementally come from micro and small enterprises (MSEs) and unsecured consumer credit.
In our new base case, we forecast annual credit losses averaging Chinese renminbi (RMB) 2.55 trillion over 2025-2027, which assumes about 3.6% annual GDP growth over the period.
This credit loss assumption is RMB40 billion higher than our estimate published last month. Our revisions follow lower in-house assumptions on GDP, due to the intensifying trade tensions.
Our downside scenario has also deepened; upside is broadly the same, given China could increase stimulus and take other measures to soften the blows.
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Rising global geopolitical tensions and tariffs, uncertainties regarding U.S. policies on the African Growth Opportunity Act (AGOA) and USAID, challenges related to security, climate-related events, as well as volatile commodity prices, imply increasing financial and economic risks to countries on the African continent.
However, sovereigns in the West African Economic and Monetary Union (WAEMU) seem to be less directly exposed to these risks than peers. Moreover, their foreign currency reserves, low inflation, as well as relatively diversified economies and benefits of WAEMU membership, represent an adequate buffer in our view.
Therefore, we still expect that, on average, WAEMU sovereigns will outperform their peers through 2027, with Senegal the only one in the monetary union for which our rating outlook is negative, due to idiosyncratic reasons.
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