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Emerging market (EM) governments are expected to stabilise debt levels and contain borrowing costs in 2027 through fiscal consolidation and increased reliance on domestic currency funding, despite continued pressure from high interest rates, according to Moody's Ratings.
In its global emerging markets outlook, the rating agency said the median overall cost of debt for emerging market governments is likely to remain stable in 2027, as efforts to reduce debt offset higher refinancing costs. "The median overall cost of debt for EM governments has been flat since 2024. We expect that median to remain stable in 2027, as debt reduction offsets the impact of higher refinancing costs," the report said. Moody's noted that the impact of higher interest rates would differ across emerging economies depending on their debt levels, currency composition and access to financing. It highlighted that around 90 per cent of outstanding emerging market bonds are denominated in local currencies, providing some protection against external currency-related funding pressures. However, borrowing costs in US dollar terms increased in 2026, although the rise was slightly lower than the increase in US Treasury yields. This was supported by narrowing credit spreads on emerging market debt, which remained close to record lows. The agency said portfolio flows reversed in September following an increase in US real yields. However, emerging market credit spreads widened only marginally, supported by strong domestic investor bases. On government debt, Moody's expects most emerging economies to stabilise their debt burdens through spending cuts, revenue-enhancing measures or a combination of both. However, rising interest payments and limited fiscal flexibility could restrict governments' ability to respond to future economic shocks. "Some of the larger EM sovereigns, namely China and India, will be willing to maintain, and able to finance, significant primary deficits," the report said. For these economies, interest payments are expected to contribute more to the increase in overall debt than primary deficits. Slower economic growth and higher borrowing costs could further complicate efforts to stabilise debt levels. Moody's also cautioned that emerging market entities with large financing requirements, weak liquidity positions and limited access to funding markets would face greater pressure from the higher interest rate environment. Despite these challenges, the rating agency maintained a stable outlook for emerging market credit fundamentals over the next 12 months, supported by efforts to manage sovereign debt, resilient commodity demand and continued investment activity. (ANI)
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