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A more hawkish stance by the US Federal Reserve and rising government bond yields in developed economies could put pressure on emerging markets by increasing borrowing costs and triggering capital outflows, according to Fitch Ratings.
In its latest Fitch Wire commentary, the global rating agency warned that emerging market economies could face tougher financing conditions despite showing resilience in recent quarters. "The resilience of emerging market credit will be tested further by a more hawkish US Federal Reserve policy stance and higher developed market sovereign yields, keeping macroeconomic policy consistency and reform credibility in focus," Fitch Ratings said. The agency noted that emerging market borrowers continued to demonstrate resilience during the third quarter of 2026 despite uncertainty surrounding the US-Iran war, with rating upgrades exceeding downgrades for the second consecutive quarter. However, the outlook remains mixed, with investment-grade issuers facing more negative rating outlooks, while lower-rated borrowers have a higher share of positive outlooks. Fitch expects financing conditions to improve across most emerging markets in 2027 as global inflation pressures ease, reducing concerns among central banks. "Our base case is for more benign funding conditions in most emerging markets in 2027, as global inflation pressures ease, alleviating central banks concerns, but risks to our assumptions remain significant," the agency said. It cautioned that countries with greater dependence on foreign-currency borrowing could face stronger pressure if higher bond yields in developed economies lead investors to withdraw funds from emerging markets. On the growth outlook, Fitch projected that emerging markets excluding China would expand by 3.3 per cent in 2027, slowing from an upwardly revised 3.6 per cent in 2026. The agency also highlighted risks from a possible correction in artificial intelligence-related investments, which have supported exports and economic activity in parts of Asia. "An AI-related market correction which is not our base case could undermine the support to emerging market growth from investment and trade," Fitch said. Its scenario analysis suggested that a severe decline in AI-related equity prices could reduce emerging market growth by up to 0.8 percentage points compared with its 2027 baseline. Fitch indicated that the impact could be greater for emerging markets excluding China if tighter global financing conditions also widen emerging market bond spreads. The agency's assessment highlights the importance of consistent economic policies, credible reforms and stronger domestic capital markets in helping emerging economies withstand potential global financial pressures. (ANI)
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