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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A weaker U.S. dollar will support disinflation across Emerging Markets (EMs), with the median EM currency up 7% year-to-date. Lower prices for imported goods in local currency, alongside subdued oil prices, will be main drivers of slower inflation in several EMs. This gives EM central banks more space to lower interest rates after years of significant monetary tightening.
EM-U.S. benchmark spreads narrowed across most emerging markets, as the recent rise in U.S. 10-year government yields did not prompt similar moves in EM counterparts—potentially signaling robust investor appetite toward developing economies. However, a historical analysis shows this is not without precedent.
Number of risky credits drops amid market slowdown. Following the upward revision of Argentina’s transfer and convertibility assessment, the number of ‘CCC+’ and lower rated issuers in EMs fell to nine from 15. This pool of entities did not issue debt in February-April 2025, indicating the sharp rise in borrowing costs triggered by the tariff-related market turmoil, as well as a manageable maturity schedule.
EM benchmarks and corporate yields narrowed in May, while the number of defaults accelerated, with three Brazilian issuers defaulting in the month, bringing the EM year-to-date count to four. Market activity rose notably in Saudi Arabia (Aramco) and Colombia (Grupo Nutresa). However, issuance was sluggish in Brazil, Mexico, and Malaysia, and it decreased in Greater China, which posted a 25% decrease from April.
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Brazilian infrastructure groups' growing cash generation and steady operating performance should help manage rising debt service costs as interest rates should remain at 14.75% until year-end.
Amid high ongoing investments, rated companies will allocate a significant portion of their cash flows to debt payments, keeping credit metrics pressured, but we don't expect an impact to ratings.
Electric utilities will take the greatest hit because of their high exposure to floating interbank deposit rates and limited capital expenditure flexibility, while toll roads and water utilities will be better positioned to postpone committed investments.
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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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Smartphones and PCs are the most exposed to U.S. tariff risk among tech companies that produce in Asia.
This is because these segments rely heavily on tariff-vulnerable markets to produce; and the U.S. market makes up a third of global PC shipments for some Asia producers.
We think companies can pass on at least some of the cost to end-buyers. Many have also diversified their supply chains in recent years, which also acts as a shield.
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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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