Emerging Markets 2026 Outlook
Regis Chatellier - Head of EM Sovereign Strategy, CreditSights
25 November 2025
Insights into Emerging Markets 2026 Outlook, including:
- EM growth accelerates to 3.9% annually: Asia leads expansion while Latin America remains subdued amid tariff pressures and fiscal consolidation challenges.
- Sovereign spreads uncomfortably tight nationwide: Meanwhile, valuations appear stretched despite strong fundamentals as mean-reversion risks intensify across investment-grade and high-yield segments.
- External balances weaken through year-end: However, FX reserves strengthen to 135% short-term debt coverage, limiting balance-of-payments crisis risks significantly.
- Eurobond issuance reaches record highs: Additionally, sovereign supply hits $260 billion with Türkiye facing largest refinancing needs followed by Indonesia regionally.
- Credit positioning favors Andean markets: Therefore, maintaining Outperform on Peru and Chile over underweight Philippines as political stability improves westward.
Executive Summary
Emerging market credit fundamentals remain sound with resilient growth, yet sovereign spreads appear uncomfortably tight currently. Meanwhile, technology valuation doubts and expected U.S. tariff increases amplify downside risks for 2026 markets.
Growth projections indicate emerging markets will reach 3.9% in 2026, up from 3.7% in 2025. However, Southeast Asia and Middle East expansion contrasts sharply with subdued Latin America and Eastern Europe performance.
External positions may weaken as U.S. tariffs and lower oil prices affect trade balances throughout 2026. Nevertheless, FX reserves now cover 135% of short-term external debt, aligning with long-run historical averages.
Fiscal deficits are expected to improve to 4.1% of GDP in 2026 from 4.5% previously. Additionally, sovereign bond issuance should reach approximately $260 billion, with Türkiye facing the largest financing needs.
Valuations appear stretched as sovereign spreads have compressed continuously since summer 2022, creating substantial mean-reversion risks. Furthermore, investment-grade sovereigns trade at tightest levels since October 2007, limiting potential for excess returns.
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