Macroeconomic uncertainty? Emerging markets surprisingly resilient.

The erratic trade policy of US President Donald Trump and the occasional flare-ups of global geopolitical tensions are causing turmoil in the financial markets. How does this affect emerging markets?
Cabezas: “The short-term effects in emerging economies are mainly indirect, for example through fluctuations in oil prices or changes in the dollar exchange rate. However, reality is not nearly as negative as one might assume from reading the headlines. In fact, some policy measures are having positive effects in the short term. When the US tariff increases were announced, on what President Trump called Liberation Day, many American companies accelerated deliveries from abroad. This stockpiling is beneficial for suppliers in emerging markets and for those countries' trade balances. Furthermore, the weakening of the US dollar has also had a positive effect. Converted into local currency, the interest and repayment obligations on dollar-denominated loans in emerging economies are reduced.”

Crijns: "We created a heat map to quickly assess how tariff increases following Liberation Day would affect our financial inclusion investments in emerging economies. It soon became apparent that the actual impact would be fairly limited. Many microfinance institutions are hardly dependent on international trade. Their clients are local farmers, shopkeepers and entrepreneurs. Furthermore, the US is not a key trading partner for many countries. In most African countries, for instance, trade with the US accounts for no more than 1% of GDP, so even high tariffs are unlikely to have a significant impact on the these economies. However, in some countries, trade measures can have indirect effect. Take Mexico: as a major trading partner, the country will inevitably be affected if the American economy slows down because US consumers find it harder to spend.”

What important long-term trends are being overshadowed by the current turmoil?
Cabezas: "Inflation in emerging markets has fallen sharply. This year, it is expected to end at 5%, compared to 8% in 2024. This is partly due to more effective policies by central banks, who are acting more swiftly and decisively than in the past. Overall, the macroeconomic fundamentals of many countries have become more robust. What will change, however, is US development aid, which is set to be scaled back. Much of this aid is humanitarian aid directed often towards countries in conflict, countries where Triodos Investment Management has little or no activity. At the same time, governments are being given greater opportunities to drive their own socio-economic development and will have to work more efficiently by investing in a highly targeted manner. This increases opportunities for private investors to make a meaningful difference.”

Crijns: “Many people are unaware of just how much the monetary position of many emerging countries has improved over the past ten to fifteen years. For example, countries like India and Brazil have significantly increased their foreign exchange reserves, strengthening their economic stability and resilience to external financial shocks. Microfinance institutions have also matured financially. When foreign funding became more costly due to rising interest rates, they shifted to attracting more local deposits, thereby reducing currency risk on their balance sheet.

Another noteworthy development is the increasing cooperation between emerging countries themselves. New trading blocs are emerging, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which does not include the US. As a result, countries like Vietnam, Indonesia and Peru are becoming increasingly attractive for international trade with partners such as Japan, Canada and Australia. This, in turn, is driving regional investment and boosting local financing needs.”

Sustainable investing has become less popular in the United States in recent years. Does this development influence your approach? And what are the most important developments in this regard?
Cabezas: "No, because we do not see a similar counter-movement in Europe. What we are experiencing here, however, is that the European Union’s stringent regulations are proving to be a significant Achilles heel. The extensive reporting requirements, in particular, place a considerable burden on some clients in emerging markets. But you do not achieve impact simply by producing more reports. True impact is realised by providing financial support to companies and making the right choices in company selection, with a clear focus on sustainability. With this in mind, it would be desirable for the European Union to consider the actual added value of certain rules for companies in emerging markets, and to assess how the regulatory burden and resulting costs could be reduced. That could well be the key to attracting more patient capital for impact investments."

Crijns: "Triodos Investment Management achieves this impact through investments in more than 40 countries across Latin America, Africa, Asia and Eastern Europe. One global development we are witnessing is the shift from cash to digital payments. Whereas customers once had to travel for hours to pay their interest in cash at a city office, this is now often done via an app. Not only is this far safer – since there is no longer a need to carry large sums of cash - but it also promotes digital inclusion.

A good example comes from Serbia, where a local financial institution in our fund portfolio supports farmers through mobile banking. During a field visit, I saw how a loan officer helped a farming couple install the app of the microfinance institution and then guide them through the process of applying for government support via a national subsidy app. For this couple, who live in a rural area, it was their first experience with digital government services. Examples like this show how microfinance also contributes to broader economic participation.

Additionally, we are seeing strong growth in financing for sustainable solutions, such as solar panels, clean cooking appliances and home insulation. These investments make households more resilient against the effects of climate change while helping to reduce energy costs. And when climate disasters strike, such as floods, it is often microfinance institutions that are the first to provide recovery loans."