The ongoing, gradual stabilization of global and domestic macroeconomic and financing conditions will support the credit quality of emerging market (EM) governments, companies and financial institutions in 2025. However, significant disruption is likely if US (Aaa negative) President-elect Donald Trump enacts the policies he discussed while campaigning. But if this disruption is limited, conditions will continue to stabilize.
Stabilization of EM credit conditions remains gradual and fragile. GDP growth
is broadly steady, inflation is slowing and policy-rate cuts are underway. Tighter credit spreads and rising bond issuance indicate investor appetite for EM bonds. This demand contributes to a virtuous cycle of increased EM investment inflows, currency gains and reduced asset risk – all of which support further GDP growth. But the US election has injected a new degree of uncertainty, including the potential for increased tariffs and trade restrictions – and also for higher US deficits, inflation and policy rates. These various developments would curb GDP growth and weaken EM currencies.
Steady but differentiated economic growth and slowing inflation will continue.
We expect aggregate GDP growth for 23 of the largest EM economies will slow to 3.8% in 2025 from 4.1% in 2024, with continued wide variation by region and country. This is driven by a slowdown in some of the largest economies including China (A1 negative). Growth will pick up in the other, smaller EMs – driven in part by domestic demand.
Governments benefit from stabilizing GDP growth and loosening financial conditions, but debt remains high. EM governments' average ratio of debt to GDP will decrease slightly next year as lower interest rates and stronger revenues help to narrow budget deficits. But mandatory spending – including on debt obligations – limits fiscal improvements. And debt-affordability metrics will deteriorate as interest rates, while easing, stay high. Default rates will move toward historical averages, having decreased steadily from high levels in 2023.
GDP growth supports earnings for nonfinancial companies. Default rates have normalized after spiking with defaults by Russian companies and Chinese property developers. Default rates will continue to decrease in 2025 as economic expansion boosts companies' earnings growth. Our industry sector outlooks are nearly all stable or positive.
Environment will be largely stable or improving for EM banks. This reflects steady GDP growth and policy-rate cuts, which will bolster credit growth and asset quality. But profitability may decline for banks in multiple countries because of imbalances in interest- rate adjustments for loans and deposits. Significant credit risks for EM banks include geopolitical tensions and potential shifts in US policy.
Credit conditions will continue to stabilize in 2025
Our base case is that credit conditions in emerging markets (EM) will continue to stabilize in 2025 with steady economic growth, slowing inflation, and monetary easing in developed and emerging markets. These conditions will support refinancing and cash flow growth, and reduce asset risk. They will also bolster demand for EM bonds and other financial assets denominated in both foreign and local currencies, thereby boosting capital flows to EMs and supporting local currencies. Investor demand for EM bonds is visible in the steady tightening of credit spreads since last year and increased bond issuance by sovereigns, financial institutions and nonfinancial companies, although issuance varies by month. This improvement in credit conditions is fragile and subject to a number of risks, however, including four main credit themes we see for sectors across the globe in 2025.
One key risk to the EM outlook is the potential for US policy changes. While campaigning, President-elect Trump made a number of policy statements that, if enacted, would cause significant disruption to both the US and global economies. These include new US tariffs and trade restrictions, and US tax cuts that imply deteriorating debt dynamics, higher inflation and policy rates. Much will depend on the nature and implementation of new US policies.
Economic growth is particularly important for EMs in building economic resilience, improving debt sustainability and attracting stable foreign direct investment. Growth also supports infrastructure development and social needs including employment, incomes and living standards. Because these various elements are typically weaker in EMs than in developed markets, the incremental benefits from economic growth tend to be more pronounced for EMs. Growth and the resulting benefits for each EM country will depend on a host of factors including the government's stability, policies and effectiveness. Finding a policy-rate sweet-spot that neither constrains nor overstimulates economic growth will also be important.
Economies and markets have been largely resilient to significant, concurrent and ongoing geopolitical strife: the separate conflicts
in the energy-rich areas of Russia and Ukraine (Ca stable), and the Middle East; and trade tensions between the US and China – the world’s two largest economies. Escalations or further outbreaks will test this resilience. This test will come soon given the likelihood of more protectionist US trade policies under President-elect Donald Trump's administration and the credit implications for economies and entities across Asia-Pacific (APAC), Europe and Latin America. In particular, an expansion of tariffs or renegotiation of existing trade agreements would likely disrupt global trade, hinder global economic growth, increase commodity-price volatility and subsequently weaken EM currencies.
EMs' ability to harness technologies such as artificial intelligence and blockchain to boost labor productivity and provide other benefits, while also managing the credit risks, will vary. Islamic finance's adoption of blockchain is one nascent application. And how the growth of private credit markets in EMs will alter the financing landscape remains to be seen. Additionally, disruptive shifts in governments' domestic policies and priorities, including more interventionist approaches, are additional credit risks.
EMs as a whole have fewer resources than developed markets for addressing their exposure to environmental and social risks, and managing the transition to a low-carbon economy. The ability to develop and finance plans for addressing these risks will increasingly become a differentiator of credit quality for entities across EMs. The ability to capitalize on positive attributes, such as the young and growing populations in Sub-Saharan Africa and Asia, will also be a differentiator.
Steady but differentiated economic growth and slowing inflation will continue
We expect most large EM economies will grow slightly below 2024 rates in 2025 and 2026. Their aggregate growth will be 3.8%
in 2025 and 2026, down from 4.1% in 2024, with continued wide variation by region and country (see Exhibit 2). Rising trade protectionism and a push in several large economies to strengthen domestic industries make external demand a less reliable source of growth. In this context, smaller economies with robust domestic drivers of growth will instead grow above 2024 rates, experiencing greater resiliency and stability.
A number of factors are driving EM growth: a widening of monetary easing, which can boost domestic and external demand by reducing borrowing costs; commodity prices that have eased off their peaks; governments' fiscal policies; and shifts in trade flows, including some countries' and companies' efforts to diversify away from China. Another significant – and now more uncertain – factor is the US: its economic growth, policy rates and likely changes in trade and foreign policies under the second Trump administration. Our baseline forecasts incorporate a degree of uncertainty with regard to US domestic and international policies.
At a regional level, economic growth will remain highest in Asia-Pacific (APAC) – even while slowing In China and India (Baa3 stable). The slowdown in China reflects the downturn in the country's property sector and the knock-on effects for households and a range of sectors. The extent to which monetary and fiscal measures announced this autumn will support new economic activity is not clear. Also unclear is the extent to which US trade and foreign policies that target China may hamper its growth. India's slowdown is from high levels, and the economy has the potential to sustain high growth rates. Growth will remain supported by household consumption and strong private sector financial health. India and countries in Southeast Asia will also continue to benefit from the global reconfiguration of supply chains, including countries' and companies' efforts to diversify trade and investment away from China.
Growth will increase in the Middle East and Africa (MEA). Commodity exporters in Sub-Saharan Africa will benefit from increased demand, particularly for materials tied to carbon transition. South Africa's (Ba2 stable) growth is likely to increase gradually next year, although remain at low levels, with the implementation of structural reforms and a shift in the government's approach on public-sector infrastructure to attract private-sector participation. In the Middle East, hydrocarbon-exporting countries are seeking to diversify their economies away from oil. Government-backed projects tied to this aim will drive strong growth in Saudi Arabia (A1 positive) next year.
Growth will slow in Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS), reflecting slowdowns in Russia and Turkiye (B1 positive). Tighter monetary policy in Turkiye is reducing domestic demand.
The situation in Latin America is mixed, although growth will remain robust compared with the past decade. It will slow in Mexico (Baa2 negative) – driven in part by high interest rates – and pick up in smaller economies. Growth will also slow in Argentina (Ca stable) with austerity measures aimed at correcting long-standing fiscal and external imbalances. And it will slow in Brazil (Ba1 positive) as higher interest rates weigh on economic activity. But growth has been stronger than expected, and ongoing structural reforms could boost it further.
Inflation will slow in most of the large EM economies next year. This, plus the start of monetary easing this year by the US Federal Reserve, European Central Bank and central banks in other developed and emerging markets, will lead to a broadening of rate cuts in EMs. But central banks globally will aim to approach neutral stances in 2025 – maintaining stable economic conditions without spurring or restraining growth.
Domestic conditions are likely to drive the easing cycle in Latin America and CEE. More rate cuts are likely in Colombia (Baa2 negative), Chile (A2 stable) and Peru (Baa1 stable) given slowing inflation. Brazil is an outlier in Latin America, having raised rates in September for the first time in two years and again in November in an effort to tame inflation. In CEE, Hungary (Baa2 stable) and Poland (A2 stable) are likely to keep rates as is because of inflation and fiscal risks.
In APAC, central banks in the Philippines (Baa2 stable) and Indonesia (Baa2 stable) initiated rate cuts in August and September, respectively, because of slowing inflation. They indicated they will proceed cautiously and keep an eye on external financial conditions and the US given the historically narrow gap between US nominal interest rates and their own. With monetary easing underway in the US, we expect these and other Asian central banks will reduce further their own policy rates and still maintain a risk premium that attracts capital, supporting their currencies and economies.
Sovereigns benefit from stabilizing GDP growth, loosening financial conditions; but debt remains high
Steady economic growth and a loosening of financing conditions in response to monetary easing will keep credit conditions broadly stable for EM governments next year. But social unrest, environmental risk, geopolitics and trade tensions, particularly between the
US and China, remain credit risks. And debt levels – plus the cost of servicing existing debt and accessing new financing – will remain high, particularly for governments with weak credit quality and limited resources. How well governments manage their public spending, taxation and financial risks will become an increasingly differentiating factor for EM sovereign credit.
We expect credit conditions will be largely stable for EM governments by region. Sub-Saharan African (SSA) governments, for example, are reducing debt and financing conditions are improving. But credit risks from large upcoming maturities and weakened debt affordability persist. And conditions in APAC include stabilizing inflation and economic growth, with strong domestic demand bolstered by modest easing in global and regional financial conditions. But credit conditions remain difficult for Chinese regional and local governments.
Many EM governments have limited fiscal space – the capacity to increase borrowing or spending and still meet debt-service and other obligations. High interest rates and spending needs will keep debt above pre-pandemic levels, especially in SSA and APAC. But economic growth and efforts to reduce discretionary spending will help some EM governments gradually reduce debt. As a result, primary balances – the difference between governments' revenue and spending before interest payments – will increase slightly for EM sovereigns in 2025 after holding relatively steady since 2022 (see Exhibit 3). Additionally, fiscal reforms are underway in a number of sovereigns, including Tanzania (B1 stable), Angola (B3 positive) and Côte d'Ivoire (Ba2 stable). If sustained, these reforms have the potential to strengthen governance and reinforce creditworthiness.
For the EM sovereigns we rate, the average ratio of debt to GDP will be around 54% by the end of 2025 – two percentage points lower than at the end of 2024 (see Exhibit 4). This ratio will continue to decrease in Latin America, Africa and APAC, with the biggest drops in Argentina, Angola and Zambia (Caa2 stable). Nevertheless, there are some regions, such as CEE, where the ratio will continue to rise in 2025. This includes Romania (Baa3 stable), Poland (A2 stable) and Bulgaria (Baa1 stable).
By contrast, debt affordability as measured by interest to revenue will remain weak for all regions but APAC and CIS, and in particular for frontier markets including many African countries (see Exhibit 4). This reflects in part still-high interest rates. In Africa, the biggest deterioration will be in Egypt (Caa1 positive) and Nigeria (Caa1 positive) where interest-to-revenue ratios will climb to 61% and 46% in 2025, from 48% and 36% in 2024, respectively.
Governments' efforts to control debt and spending, combined with continued economic growth, contribute to our expectation that EM sovereign defaults may decrease to historical averages in 2025 (see Exhibit 5). EM sovereign credit spreads have tightened and access to financing has increased, which will continue to support sovereign credit quality.
But about 26% of the EM governments we rate have weak credit quality, as reflected in their credit ratings of Caa1 or below. This percentage is up from less than 10% in 2013. Default risk will remain high for these governments.
GDP growth supports earnings for nonfinancial companies
Conditions will also be stable for EM companies in 2025. About three-quarters of the weight of a particular Bloomberg EM US dollar aggregate corporate bond index consists of nonfinancial companies. Of these, 70% are EM companies that are part of a global corporate sector for which we have a stable Industry Sector Outlook (ISO). And about 28% are part of a sector with a positive ISO. The ISO distribution signals stability across corporate sectors, with economic growth and monetary easing supporting corporate earnings globally.
The sectors with stable outlooks include diversified manufacturing and real estate (see Exhibit 6). We changed both outlooks to stable from negative this year. We also changed the outlooks to positive from stable for chemicals and diversified information technology. But following a brief period with no negative outlooks, we changed the outlook for the automotive sector to negative from stable in October.
Corporate credit metrics remain solid, and the ratio of positive to negative rating actions is the highest of the past decade (as of 20 October). Default rates have normalized after a period of concentrated defaults among Russian companies and China property developers. The default rate for high-yield EM companies1 will continue declining in our baseline scenario: to 1.7% by year-end 2025 from 2.7% at year-end 2024.
Additionally, the difference in bond yields for speculative-grade EM and developed-market companies has narrowed even as monetary easing has reduced yields. This narrowing signals investor demand for EM corporate bonds.
Over the past two years, this tightening has coincided with higher recovery rates for bondholders following EM corporate defaults (see Exhibit 8). This likely reflects improved economic conditions and market sentiment, and lower perceived risk for EM bonds. Higher recovery rates signal to investors that they are likely to recover a larger portion of their investments in the event of default, which supports demand for EM bonds.
Banks face higher loan growth and stable asset quality, but declining profitability
The operating environment for EM banks will be largely steady or improve in 2025. Stabilizing economic growth and the rising number of central banks around the globe cutting policy rates will support credit growth and asset quality.
But profitability will deteriorate for many banks because they typically reduce interest rates on loans faster than on deposits as they seek to attract and retain customers. This squeezes net interest margins. A pickup in loan growth as the cost of borrowing decreases and stable loan-loss provisions will limit the squeeze, however. Profitability will remain stable in Latin America and increase in parts of Africa. Support in Latin America comes from a recovery in business volumes and a gradual decline in credit costs, although competition and still-high funding costs will weigh on margins. And Africa reflects higher net interest margins on the back of increased policy rates.
Geopolitical conflicts and resulting restrictions on cross-border and investment flows are a significant credit risk for EM banks. And the potential for postelection changes to key US policies, including financial and technology regulation, could alter the operating environment.
Our credit outlook for EM banks is informed in large part by our outlooks for the banking systems in individual countries. These Banking System Outlooks (BSOs) for the 46 EM systems we assess are mostly stable. Another sign of sector stability is the rating outlooks on the nearly 470 EM banks we cover: most of those outlooks are also stable.
China, Colombia and Argentina are among the small number of EM countries in which the banking environment is challenging. In China, asset risk will stay elevated amid structural challenges in the economy. And the property sector's stress continues to pose spillover risks to the financial sector. Because China has some of the lowest nominal interest rates across EMs, banks' profitability will deteriorate further as net interest margins decline. But the operating environment appears to be stabilizing with the series of measures the Chinese government and central bank announced this autumn, which include support for the property sector.
In Colombia, the lack of confidence from individuals and businesses will limit credit growth. And in Argentina, an ambitious reform agenda will test banks' capacity to adapt to changes in the operating environment.
By contrast, in the rest of Latin America, asset quality is improving, supported by macroeconomic performance. In Chile and Peru, banks will improve their loss-absorption capacity because of an increase in core capital. In Brazil, banks have expanded buffers over minimum capital levels in anticipation of new allocation requirements for operational risk that will take effect in 2025.
In the Gulf Cooperation Council, governments continue their efforts to expand the nonhydrocarbon sector, which will support banks' solvency and liquidity, although rising geopolitical tension remains the key credit risk.
Across the African continent more broadly, operating conditions, although difficult, will improve as inflation eases across the continent and policy rates decrease gradually. Capitalization will remain solid and supported by the ongoing rollout of higher regulatory capital requirements across several jurisdictions. And foreign currency shortages will ease modestly as lower global rates and local currency adjustments support foreign currency inflows.
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