Emerging market economies have been generally resilient in 2026, with sovereign rating upgrades outpacing downgrades. The US-Iran memorandum of understanding to extend the ceasefire and open the Strait of Hormuz eases risks somewhat. However, the recent flare-up highlights persistent risks, and the war will still have some adverse macroeconomic impact.
The formation of an El Niño weather phenomenon that is set to persist into early 2027 will provide a new challenge for those
emerging markets facing adverse environmental conditions. Potential effects include loss of agricultural output, higher inflation,
pressure on external finances, more costly food subsidy schemes and shortages of hydropower generation.
Lower-rated sovereigns, especially those in the ‘B’ category or below with limited market access or a record of rising debt in crises, are most exposed. But Fitch Ratings is unlikely to link rating actions directly to El Niño unless the effects are clearly reflected in credit metrics.
In 2026, Fitch has upgraded seven emerging market sovereigns (Argentina to ‘B-‘, Aruba to ‘BBB’, Bolivia to ‘CCC’, Ecuador to ‘B-‘, Ghana to ‘B’, Maldives to ‘CCC-‘ and South Africa to ‘BB’) and downgraded just two: Bahrain to ‘B’ and Mozambique to ‘CC’.
There are 10 emerging market ratings on Positive Outlooks balanced by 10 on Negative Outlook or Watch. The net balance of
Outlooks and Watches has declined from +3 before the US-Iran war.
