Emerging Market Governments Expected to Stabilise Debt Levels in 2027

Moody's projects emerging markets will stabilize debt in 2027 via fiscal consolidation and local currency funding. Despite high interest rates, credit fundamentals remain stable, supported by resilient domestic investor bases and policy efforts.

Emerging Market Debt Outlook for 2027

Emerging market (EM) governments are expected to stabilise debt levels and contain borrowing costs in 2027 through fiscal consolidation and increased reliance on domestic currency funding, despite continued pressure from high interest rates, according to Moody's Ratings. In its global emerging markets outlook, the rating agency said the median overall cost of debt for emerging market governments is likely to remain stable in 2027, as efforts to reduce debt offset higher refinancing costs.

"The median overall cost of debt for EM governments has been flat since 2024. We expect that median to remain stable in 2027, as debt reduction offsets the impact of higher refinancing costs," the report said.

Impact of Interest Rates and Currency Composition

Moody's noted that the impact of higher interest rates would differ across emerging economies depending on their debt levels, currency composition and access to financing. It highlighted that around 90 per cent of outstanding emerging market bonds are denominated in local currencies, providing some protection against external currency-related funding pressures.

However, borrowing costs in US dollar terms increased in 2026, although the rise was slightly lower than the increase in US Treasury yields. This was supported by narrowing credit spreads on emerging market debt, which remained close to record lows. The agency said portfolio flows reversed in September following an increase in US real yields. However, emerging market credit spreads widened only marginally, supported by strong domestic investor bases.

Fiscal Strategies and Growth Challenges

On government debt, Moody's expects most emerging economies to stabilise their debt burdens through spending cuts, revenue-enhancing measures or a combination of both. However, rising interest payments and limited fiscal flexibility could restrict governments' ability to respond to future economic shocks.

"Some of the larger EM sovereigns, namely China and India, will be willing to maintain, and able to finance, significant primary deficits," the report said. For these economies, interest payments are expected to contribute more to the increase in overall debt than primary deficits. Slower economic growth and higher borrowing costs could further complicate efforts to stabilise debt levels.

Liquidity Risks and Credit Outlook

Moody's also cautioned that emerging market entities with large financing requirements, weak liquidity positions and limited access to funding markets would face greater pressure from the higher interest rate environment. Despite these challenges, the rating agency maintained a stable outlook for emerging market credit fundamentals over the next 12 months, supported by efforts to manage sovereign debt, resilient commodity demand and continued investment activity.

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