Emerging economies have been a driving force behind global growth, and their resilience is crucial for the overall health of the world economy. Despite the challenges posed by the COVID-19 pandemic, emerging economies have shown remarkable resilience, with many countries experiencing strong economic growth. However, as we enter 2026, concerns are growing about the sustainability of this growth. Will emerging economies continue to hold up, or will they succumb to the headwinds of a slowing global economy?

The answer to this question is complex and depends on various factors, including the performance of key economies, trade policies, and monetary and fiscal conditions. In this analysis, we will examine the prospects for emerging economies in 2026, focusing on the key drivers of growth and the challenges that lie ahead.

Strong Growth in 2025, but at a Cost

In 2025, emerging economies experienced strong growth, 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. According to the Institute of International Finance, non-resident portfolio investment inflows were very weak in H1 2025, but after a particularly strong H2 2024, and then they rebounded sharply during the summer of 2025. Most emerging currencies have appreciated against the US dollar since 2 April, completely or partially correcting the depreciation that followed Donald Trump's election. CDS spreads experienced the same sequence of tension followed by easing. Finally, for most countries, yields on local currency sovereign bonds have continued to fall since April, helped by monetary policy easing.

However, this growth came at a cost. The increase in public debt ratios has reduced fiscal room for manoeuvre, and the need to curb the increase in debt ratios has become more pressing. In many countries, fiscal deficits and public debt are significantly higher than before the COVID crisis, and fiscal policy is therefore constrained by the need to adjust public accounts.

The Impact of US Tariffs

One of the key challenges facing emerging economies is the impact of US tariffs. The trade war between the US and China has had a significant impact on global trade, with many countries feeling the pinch. The effects of US tariffs are likely to spread further in 2026, with trade tensions and the risk of new protectionist measures persisting, particularly against China. According to IMF forecasts, growth in total goods exports is expected to slow to +2% in volume in 2026, before accelerating again in 2027-2028.

Financial Conditions: A Mixed Bag

Financial conditions in emerging economies are expected to remain broadly accommodative in 2026. Monetary easing will continue, with many central banks maintaining or lowering their policy rates. However, the average magnitude of policy rate cuts is expected to be smaller than in 2025. Capital flows could become more volatile, with episodes of downward pressure on emerging currencies increasing. Latin American countries such as Colombia and Brazil appear particularly vulnerable.

Fiscal Policy: A Balancing Act

Fiscal policy will be more constrained in 2026, with many countries facing the challenge of balancing the need to adjust public accounts with the need to support economic growth. In many countries, fiscal deficits and public debt are significantly higher than before the COVID crisis, and fiscal policy is therefore constrained by the need to adjust public accounts. Governments are adopting a wide variety of strategies to address this challenge, including austerity measures, structural reforms, and fiscal consolidation.

A 2026 Outlook

So what does this mean for emerging economies in 2026? We expect average economic growth in emerging countries to fall just below 4% in 2026, for the first time in the post-COVID period. While this is still a respectable growth rate, it is lower than the 4.1% average growth rate in 2025. The key challenge facing emerging economies in 2026 will be to balance the need to adjust public accounts with the need to support economic growth. This will require careful management of fiscal policy, as well as a continued focus on structural reforms and investment in human capital.

Actionable Insights

So what can investors do to take advantage of the opportunities in emerging economies in 2026? One key strategy is to focus on countries with strong fundamentals, such as Brazil and Mexico. These countries have made significant progress in recent years in terms of structural reforms and investment in human capital. Another key strategy is to focus on sectors that are likely to benefit from the ongoing shift towards a more sustainable and environmentally-friendly economy. These sectors include renewable energy, electric vehicles, and sustainable agriculture.

In conclusion, emerging economies will continue to play a crucial role in driving global growth in 2026. However, the challenges facing these economies are significant, and policymakers will need to be careful in managing the trade-off between fiscal policy and economic growth. By focusing on countries with strong fundamentals and sectors that are likely to benefit from the ongoing shift towards a more sustainable economy, investors can take advantage of the opportunities in emerging economies in 2026.