Emerging markets face tougher funding conditions as global borrowing needs rise

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Emerging markets funding challenges

Highlights

Emerging market financing conditions are tightening as developed market borrowing needs grow, pressuring emerging economies' ability to attract capital, according to S&P Global Ratings.
Sensitivity to rising U.S. Treasury yields varies significantly, with Mexico, Chile, South Africa, Turkiye, and the Philippines showing higher correlation and market volatility.
Heightened geopolitical uncertainty and persistent inflation risks are making external financing increasingly difficult for the most exposed emerging markets.

Funding pressures build across emerging markets

As reported by S&P Global Ratings, emerging market financing conditions are entering a more challenging phase as higher borrowing needs in developed markets compete for investor capital. The ratings firm says this could test whether emerging markets can keep funding themselves as easily as they have in recent years if external conditions become less supportive.

It says the effects are unlikely to be uniform across countries or sectors. Outcomes are set to diverge more sharply depending on refinancing requirements, policy settings and the depth of domestic capital markets.

Market sensitivity differs by country

Rising U.S. Treasury yields are affecting emerging market local-currency bonds in different ways, underscoring how uneven the pressure is across markets. S&P Global Ratings says sensitivity to these moves varies considerably, with Mexico, Chile, South Africa, Turkiye and the Philippines among the markets showing greater correlation to U.S. Treasury movements lately.

High geopolitical uncertainty and persistent inflationary pressures are also shaping the outlook for funding conditions. Together, these factors are increasing the risk that external financing becomes harder to secure for the more exposed emerging markets.

In our earlier article on the sharp selloff in sovereign bond markets, we explained how surging U.S. Treasury yields and wider moves across developed-market debt were pushing borrowing costs higher and reshaping expectations for “higher for longer” interest rates. We also noted that heavier issuance, policy uncertainty and rising volatility were adding to funding strain across the economy, with knock-on effects for corporate credit and broader risk sentiment.

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