New Delhi: Emerging markets, including India, are heading into 2026 with steadier growth but rising vulnerability to geopolitical tensions, climate shocks and uneven investment flows, Moody’s Ratings said in its emerging markets outlook on Tuesday, warning that the coming year will test the resilience of governments and companies across Asia, Latin America and Africa.
While many developing economies have absorbed the effects of tighter global financial conditions, Moody’s Ratings said the next phase of risk will “increasingly be driven by local factors,” including political transitions and fiscal constraints to escalating weather-related hazards.
“EM (emerging market) governments are focusing on their domestic priorities and also on bolstering cross-border relationships as they seek to navigate tariffs, US-China tensions, and other geopolitical stresses. Elections in a number of EMs bring the potential for policy changes,” Moody’s said. “And societal opposition to new and existing policies will continue pushing some EM governments to prioritize social stability over long-term reforms.”
Moody’s Ratings expects India’s economic growth to expand steadily at 6.5% through 2027, compared with a projected 6.4% in calendar 2026 and 7% in 2025, it said in a separate report last week. According to the rating company, government-led capital expenditure and resilient household consumption will continue to power India’s economy even as private investment stays cautious.
Moody’s noted that US policy rate cuts, increased investor risk appetite and a weaker dollar, along with interest in diversifying away from the US, will continue to spur capital inflows to emerging markets.
“This will further the growth of local currency bond markets, which have expanded rapidly over the past decade,” it said. “Uncertainty in the lead-up to domestic elections and unexpected policy shifts within countries may, however, dampen investor appetite at times, particularly for debt from entities with relatively weak credit quality.”
Trade fragmentation
However, Moody’s expects the global economy to remain fragile in 2026, with economic expansion expected to slow marginally in 2025 before stabilizing. Trade fragmentation is expected to deepen as tariff disputes and strategic competition between major powers accelerate supply-chain reorientation.
“Credit conditions in emerging markets will be shaped by a more inward and populist shift in policy making across major economies, affecting trade and cross-border financial flows. The US-China rivalry adds to policy unpredictability and global fragmentation,” it said. “In response to tariffs the US imposed this year, EMs are further diversifying trade relationships. They are negotiating bilateral deals with the US, strengthening ties with China, and striking new or updated agreements with the EU and other partners.”
In Asia, policymakers are contending with shifting capital flows shaped by artificial intelligence and cloud computing, which have sparked rapid growth in data-centre investment, Moody’s noted. It said AI-driven demand will significantly increase the need for data centre capacity, reshaping infrastructure priorities from Singapore to Mumbai. But new investments will not be evenly distributed.
Climate hazards
Climate risk remains the region’s most persistent challenge. Moody’s noted that Asia-Pacific sovereigns have high inherent exposure to physical climate hazards including cyclones, floods, and heat stress, which threaten credit quality over time by straining public finances and damaging essential infrastructure. Limited fiscal capacity, particularly in South Asia, continues to constrain adaptation efforts.
Despite the mounting headwinds, Moody’s said emerging markets are entering the year with more balanced macroeconomic fundamentals than in earlier crises.
“GDP growth is broadly steady if subdued, and inflation is easing. Domestic demand for goods and services is robust, trade linkages are diversified, and monetary policy frameworks are credible in many large EMs,” the rating company said. “Investor demand for EM debt is visible in narrowing credit spreads, bond issuance growth, and capital inflows. Corporate and sovereign EM default rates are declining amid these supportive conditions; the corporate default rate will remain near pre-COVID levels over the next 12 months in our baseline projection.”