Astricter approach by the US Federal Reserve and increasing government bond yields in developed countries could strain emerging markets.
This situation might lead to higher borrowing costs and cause investors to pull out funds, as per a recent report by Fitch Ratings.
Fitch warns that despite showing strength in recent times, emerging economies could face tougher financial conditions. The agency specifically noted that the continued tough stance from the US Fed and higher bond returns in developed nations will test the resilience of these markets. This puts a spotlight on the need for consistent economic policies and credible reforms.
While emerging market borrowers demonstrated stability in the third quarter of 2026, with more upgrades than downgrades, the future remains uncertain. Fitch expects funding conditions to generally improve across most emerging markets in 2027 as global inflation pressures ease. However, countries heavily reliant on foreign-currency borrowing could face significant pressure if investors shift funds due to higher bond yields elsewhere.
Regarding growth, Fitch projects emerging markets (excluding China) to grow by 3.3% in 2027, a slight slowdown from 3.6% in 2026. The agency also highlighted a potential risk from a correction in AI-related investments, which have boosted exports and economic activity, especially in parts of Asia. A severe drop in AI-related stock prices, though not Fitch’s primary expectation, could reduce emerging market growth by up to 0.8 percentage points in 2027. This emphasizes the need for strong domestic financial markets and consistent policies to navigate global economic shifts.