Emerging markets face a widening range of global risks, from ongoing conflicts to uncertainty around Fed policy, US tariffs and climate events. Resilience, however, differs across countries. Commodity exporters are better positioned, while net commodity importers with large funding needs remain vulnerable. Countries with strong fiscal positions, high real policy rates and firmer currencies bolster emerging markets’ stability. Patient capital, rather than short-term flows alone, remains essential for development, yet is harder to attract in periods of uncertainty. Although risks remain, selective resilience is likely to persist. Overall emerging markets growth is likely to moderate in 2026 with inflation rising this year.
The Strait of Hormuz crisis remains unresolved, with the US-Iran ceasefire collapsing and hardliners consolidating power in Tehran, making a diplomatic breakthrough increasingly unlikely.
Solid economic expansion, but increasingly debt-financed
In the background diplomatic talks continue and new alliances are being built, including a recent Saudi-Turkey-Pakistan defense pact. However, the prolonged standoff is weighing on economic growth, particularly in emerging Asia and the Middle East, where GDP expansion is slowing. Despite this, commodity-exporting nations have benefited from higher prices and stronger currencies, while net oil importers like Bangladesh are facing funding constraints and energy shortages.
To mitigate these challenges, renewable energy adoption is accelerating. China’s green-tech exports surged by over a third in early 2026, and countries like Pakistan and the Philippines are rapidly expanding solar capacity. India’s solar rollout has been slower due to local manufacturing policies and grid limitations, requiring a 27-fold increase in battery storage to meet clean energy demand. Meanwhile, Bangladesh struggles with institutional constraints, resulting in costly fossil fuel imports at nearly triple pre-crisis prices.
Key risk
The Federal Reserve’s policy uncertainty remains a key risk for emerging markets, as shifts in US interest rates impact borrowing costs and increase currency volatility. While some nations, like Colombia, have sufficient reserves to intervene and reduce currency pressures, others may need IMF support to bolster their buffers. Unexpected US tariff increases are adding to this uncertainty, including the latest trade dispute with Canada, tariffs on goods from 60 countries accused of allowing forced labour and measures targeting trade rerouted through third countries to reduce Chinese import duties. China has temporarily suspended export controls on rare earths, with the decision due for review by November 2026. If China reinstates these controls, supply chains for renewables, defence and AI could be disrupted, given its dominance in rare earths.
Climate risks are also intensifying, with El Niño-driven heatwaves increasing energy demand and reliance on coal in China and India. In Latin America, drought caused by El Niño in the past has exposed the vulnerability of hydropower-dependent systems within and between countries, leading to blackouts and the use of costly back-up fossil fuels’ generated plants.
Many emerging markets are showing that they can deal with uncertainty and that they can offer diversification gains to investors, attracting record bond issuances and short-term capital flows. While patient capital for sustainable development remains limited, as it needs economic stability as an anchor. The emerging markets outlook in the rest of the year, shows a manageable slowdown in growth and inflation increasing further. A deterioration of this outlook hinges on an escalation of the US-Iran conflict, abrupt Fed policy shifts and unexpected US-China trade tensions.
Read the full Q3 2026 Emerging Markets outlook here.