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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Increased uncertainty surrounding U.S. trade policy may delay investment decisions and impact emerging markets (EM) linked to countries that have been targeted by U.S. tariffs. EM central banks are likely to adopt a cautious approach to monetary policy normalization, as the U.S. dollar strength could exacerbate capital outflows if interest rates are cut too aggressively.
The EM equity performance has been solid since the beginning of the year. However, following the U.S. election, all regions have lost ground, except for Europe, the Middle East, and Africa (EM EMEA), which is less threatened by tariff threats than EM Asia and Latin America (LatAm). Together with exchange-rate movements, the equity performance will be a key determinant of portfolio flows in 2025.
EM central banks remain cautious amid U.S. trade and fiscal policy uncertainty, scaling back rate-cut expectations. The Fed’s policy remains critical, as it could intensify capital outflows from EMs that ease rates too aggressively. Brazil diverges, hiking rates by 225 basis points (bps) since September 2024 due to fiscal concerns.
Benchmark yields retreated from their December widening. Still tight corporate spreads fueled a strong speculativegrade issuance month. Market activity was particularly solid in EM EMEA. Mainly fixed-rate issuance was denominated in hard currency. Trade tariff threats remain the main downside risk to financing conditions in EMs.
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Starting in January 2025, financial institutions in Brazil will be required to implement new regulatory measures. These include adopting a new methodology for determining provisions for credit losses, implementing a revised calculation for operational risk in regulatory capital adequacy, and complying with significant modifications in tax accounting rules aiming to reduce deferred tax assets (DTAs).
The objective of these changes is to strengthen the risk management practices of financial institutions and align them with international accounting standards.
However, we believe that the implementation of these regulatory changes will not be without its challenges. Financial institutions will need to navigate through a complex web of new rules that may increase provisions and squeeze capital metrics.
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EMEA emerging markets enter 2025 with a positive outlook bias after 12 upgrades and four downgrades in 2024. The region constitutes 55 of S&P Global Ratings' 139 rated sovereigns and accounted for about 60% of upgrades globally in 2024.
Headwinds from geopolitical risks persist.
A stronger dollar, rising global protectionism, and an uncertain outlook for Chinese economic growth are key risks for all emerging markets including those in EMEA.
The average rating in the region will likely remain below pre-pandemic levels over 2025. This also reflects the increasing share of frontier sovereigns in our ratings.
Negative rating actions and outlooks mainly reflect worsening fiscal imbalances, often connected with strained institutional credibility or military conflicts.
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President-elect Trump has proposed applying a 60% tariff on all Chinese goods imported to the U.S. We view this as an unlikely, maximalist scenario that would have steep consequences for the Chinese economy and an array of sectors.
In this thought exercise, we are only considering direct effects on the Chinese economy and selected sectors. The Chinese government could implement targeted stimulus in response, or other countermeasures that would ease the pain.
However, given the difficulty of tracking the effects of rounds of cascading measures, we kept this as simple as possible. We are just looking at the consequences of an across-the-board 60% tariff, assuming no ameliorative or retributive actions from China.
We assume the scenario would involve heavy hits on the Chinese economy and on an array of Chinese industries that rely on U.S. exports. Our persistent view is that it will be difficult for companies to pass on higher tariff costs to consumers, and that it will be hard for international firms to adjust supply chains away from China.
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We expect global sukuk issuance to reach about $190 billion to $200 billion in 2025, with foreign currency-denominated issuance contributing $70 billion to $80 billion.
Total sukuk issuance amounted to $193.4 billion at year-end 2024, slightly down from $197.8 billion a year earlier but with a significant increase in foreign currency-denominated issuance.
Our forecasts assume no disruption from new standards, no major shift in global liquidity compared with our base-case expectations, and no major increase in geopolitical risk in the Gulf Cooperation Council (GCC) region that could derail the economic performance of top issuers' countries of domicile.
Due to evolving Sharia requirements, we note that some structures used by issuers in the GCC may contain additional risks for investors compared with conventional issuance.
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