In today’s discussion, we delve into the public finances of emerging economies in 2025, based on an exclusive analysis of our most recent EcoPerspectives issue focused on these economies. With robust but slowing growth, rising public debt and limited fiscal flexibility, what challenges and opportunities lie ahead for these countries?
Growth in emerging economies remained solid in 2025, driven by exports and supportive financial conditions. Global trade was stimulated by export front loading ahead of US tariff increases, as well as by the reconfiguration of trade flows and the boom in the tech sector. In 2026, growth in emerging economies is expected to remain resilient but become more moderate. Supportive factors are likely to fade and global trade is expected to slow down. Fiscal and monetary policies will continue to support domestic demand but will be more constrained than in 2025. Monetary easing will be more measured, and fiscal room for manoeuvre will be reduced by the need to curb the increase in public debt ratios.
Growth in emerging economies has remained solid since the beginning of the year, thanks in particular to buoyant exports and easing financial conditions. Up until the summer, the front-loading of purchases in anticipation of tariff increases in the United States stimulated trade. In addition, global trade flows have been reorganised. In 2026, fiscal and monetary policies will continue to support growth, but will be more constrained. Monetary easing will be less pronounced than in 2025, if only because of the uneven pace of disinflation across countries. Fiscal policy will be constrained by the need to curb the growth of public debt ratios
Central Europe: resilience | Asia: Exports remain buoyant | North Africa/Middle East: Cautious optimism | Latin America: Little impact from the US tariff shock, but fragile public finances
Key indicators for major emerging countries and their public debt and vulnerability to external financial conditions.
Monetary easing in Asia and Latin America, but vigilance in Brazil and Central Europe: what risks weigh on their growth?
Economic growth in emerging countries held up well in the first half of 2025. So far, US tariff measures have had little impact on global trade and therefore on their exports. Furthermore, domestic demand, another driver of growth in these countries, remains strong, in particular thanks to the support of domestic credit. Bank lending growth has returned to its pre-COVID level for a large number of countries, it exceeds potential GDP growth in real terms. This is a trend to watch, as it could lead to a deterioration in foreign trade and/or an increase in non-performing loans.
On August 1, the United States published an updated list of its “reciprocal” tariffs. While this new version provides some clarity, it does not offer a long-lasting explanation of the Trump administration's protectionist policy. In the short term, it changes the game for certain countries, particularly India and China.
The latest monetary tightening in the United States between March 2022 and July 2023 resulted in much larger outflows of portfolio investments by non-residents than during the previous tightening (2016-2018) and the famous taper tantrum of 2013. However, emerging economies are less vulnerable to monetary tightening across the Atlantic than they were a decade ago. On the one hand, the impact of "flight to quality" capital movements by non-resident private investors on risk premiums and local currency bond yields is less significant. Secondly, the level and structure of corporate debt have improved.
The protectionist shock imposed by the United States will lead to further adjustments in production chains and global trade. Will emerging countries (excluding China) be able to benefit once again, even as competition from Chinese products intensifies on their domestic markets? Will they be able to gain market share in the United States, or even in China? Will they be able to reduce their dependence on either of the two superpowers?
Under the impact of the Trump administration's tariff policy and the acceleration of US-China decoupling, global economic growth is expected to slow, international trade to reconfigure and the reorganization of value chains to continue. These changes will have multiple effects on emerging countries. Their export growth will slow and competition from Chinese products will increase. Some countries could nevertheless take advantage of new opportunities to attract FDI and develop their manufacturing base.
The tariffs imposed by the Trump administration and the acceleration of the US-China decoupling will lead to a slowdown in global economic growth, a further reconfiguration of international trade, and the continued reorganization of value chains. These changes will have multiple consequences for emerging countries. All will suffer negative effects linked to the slowdown in their exports and increased competition from Chinese products. Some may also seize new opportunities to attract FDI and develop their export base.
The two most recent shocks to emerging countries (the 2022-2023 tightening of US monetary policy, and the election of Donald Trump at the end of 2024) have not affected their financing conditions. However, supporting factors have weakened since the second half of last year. In the coming months, financing conditions could tighten as a result of rising geopolitical risk in particular. However, the adverse impact on emerging economies should be viewed in perspective, given the low transmission of the two recent external shocks to interest rates. Although exchange rates have continued to depreciate against the dollar, the vulnerability of debt to foreign exchange risk is moderate or low for households and non-financial companies
Resilience of external financing conditions overall. The election of Donald Trump to the White House has caused a rally in the US dollar and revived uncertainties about the external financing conditions of emerging countries. The Argentinean peso, the Turkish lira and the South African rand are among the emerging market currencies that recorded the largest depreciations between November 5th, 2024, and February 24th, 2025, losing 6.3%, 5.7% and 5.2% of their value against the US dollar, respectively. Overall, emerging sovereigns should be relatively resilient against a stronger dollar and the risk of increased investor selectivity towards risky assets. However, all of them are not in the same boat
Since taking office, President Trump has confirmed his threats to raise tariffs, but fears of universal and widespread application have abated somewhat. He will decide whether to carry out his threats once an audit of the United States' trade relations with all its trading partners has been completed, which should be by the beginning of April. Between now and then, and even over 2025 as a whole, the divergence in the trajectory of world trade between advanced countries and emerging and developing countries (EMDs) is set to increase. Trade between EMDs is expected to grow significantly faster in 2025 (5%) than during the 2012-2018 pre-COVID period (+3.9% per annum on average), whereas it will be the opposite for advanced countries
Since 2019, private sector debt in emerging countries as a whole has risen as a percentage of GDP, while at the same time private sector debt in advanced countries has fallen. However, a country-by-country analysis shows that China alone is responsible for this increase and that, even excluding China, debt ratios show positive aggregation effects. In fact, on the basis of median ratios and credit gaps, excluding China, the private sector has develeraged in a large number of countries, until the third quarter of 2024. Current and future economic and financial conditions point more to a continuation of the decline than to a rebound.
While emerging economies (EMEs), apart from China, have contributed little to global warming, the future CO2 emissions curve and the resulting additional temperature rise will largely hinge on their ability to conciliate growth and decarbonisation. However, due to limited financial resources, their investments in the "green" transition are low, at around 50 dollars a year per capita, compared to investments which are around seventeen times higher (850 dollars a year per capita) in developed countries. This disparity gave rise to the idea of securing transfers from developed to developing countries at the Copenhagen Conference of the Parties (COP), in 2009.
The election of Donald Trump has not triggered any major financial tensions in the main emerging markets. Nevertheless, the dollar has strengthened, which should delay the easing of monetary policies. More worryingly, emerging economies will be the direct or collateral victims of the trade war promised by the incoming United States administration. They will face a double shock: a sharp slowdown in global trade and the re-routing of Chinese exports. The first shock is bound to be recessionary or even inflationary. The impact of the second is not clear cut as it hinges on the types of Chinese exports (complementary or competing) and, most of all, on their link with direct investment.
The economic slowdown in China and the implementation of its industrial policy will have large consequences for the rest of the world. Effects will vary from country to country, depending on the transmission channels. For emerging countries, the overall impact will not be necessarily negative, notably thanks to the foreign direct investment channel, which could well change the situation. We are discussing this with Christine Peltier.
Since the start of the year, growth in emerging countries has held up quite well. This is reflected not only in business and household confidence, but also in the confidence of foreign investors in the local bond and stock markets. The tightening of US monetary policy from early 2022 to mid-2023 did have a major negative impact on portfolio investment flows. However, this impact was largely offset by the attractiveness of emerging markets for both private and institutional investors, whether for purely financial reasons (carry trade strategies) or as part of a diversification strategy
Monetary and exchange rate conditions in emerging economies are more favourable in this early part of the year than they were at the end of 2022 and beginning of 2023. The relaxation of monetary policies made possible by lower inflation and upward revisions of economic growth forecasts has attracted portfolio investment. Despite the increase in geopolitical risk, sovereign risk is likely to reduce except for the most fragile countries, which were already under pressure in 2023. For low-income countries, 2024 will be a high-risk year as governments’ external debt repayments will remain very heavy, just as they were in 2023.
Monetary and forex conditions in emerging economies are more favourable in this early part of the year than they were at the end of 2022 and beginning of 2023. The relaxation of monetary policies made possible by lower inflation and upward revisions of growth forecasts have attracted portfolio investment. Despite the increase in geopolitical risk, sovereign risk is likely to reduce except for the most fragile countries, which were already under pressure in 2023. For low-income countries, 2024 will be a high-risk year as governments’ external debt repayments will remain very heavy, just as they were in 2023.
Growth in emerging countries held up quite well in H1 2023, thanks to countries in Asia, Brazil and Mexico. In Asia, inflation returned to very moderate levels in August or September (with the exception of India) and, compared to other areas, monetary tightening between mid-2021 and mid-2023 was on a much smaller scale. This helped offset the drop in exports. However, Central European countries did not benefit from this offset effect. Business and household surveys indicate that disparities between areas became more pronounced over the summer. These surveys also show that the heavyweights in Latin America (Brazil, Mexico) are better positioned within the major EM regions.
Emerging markets exports contracted sharply in late 2022-early 2023, particularly in Asia due to the turnaround in the global electronic cycle. But US/China structural decoupling is probably already at work.
The scenario of a slowdown in the emerging economies in 2023 is based on two hypotheses: 1) a slowdown in global trade and 2) the recessionary impact of inflation and monetary tightening. The first hypothesis is now a certainty: exports have clearly contracted in recent months, in both the advanced countries and emerging economies. The causes are partially circumstantial, and hopefully the cooling of world trade will only be cyclical. It is possible, however, that the trade and technological decoupling of the US and China are also a contributing factor.
