Outlooks 2026: Global sovereigns are negative but emerging markets hold stable

Executive Summary

Global Sovereign 2026 Outlook: Negative as policy, political risks outweigh pockets of resilience

Ongoing uncertainty about US (Aa1 stable) policy shifts and widespread domestic and geopolitical tensions hamper global fiscal recovery despite broadly stable growth and contained inflation. High debt levels increase affordability pressures while rigid budgets constrain policy effectiveness. New developments like AI create both opportunities and risks.

>> Fractured politics test institutions and shift focus to short-term policies. Global economic uncertainty about US policy is slowing investment and consumption. Political polarization and social unrest push governments to focus on immediate issues like unemployment and living costs. Polarization also impedes policy consensus and tests institutions and policy effectiveness.

>> Growth muted but stable as economies adapt to trade and financial changes. We forecast broadly unchanged global economic growth in 2026. Emerging economies, especially Sub-Saharan Africa, will grow the fastest. Western Europe and Asia-Pacific will grow more slowly than pre-pandemic. AI could boost productivity, mitigating low growth and population aging, but increases resource consumption and challenges regulatory frameworks.

>> Consolidation pause will keep debt high, limiting fiscal room to face shocks. Most sovereigns will keep their primary fiscal balances close to 2025 levels. Debt/GDP ratios will remain high, limiting the ability to absorb future shocks, particularly for emerging economies and a number of A-rated sovereigns. Rigid budgets in the face of higher defense and social spending pressures will further restrict fiscal consolidation and governments' capacity to cut debt.

>> Weakening debt affordability will hurt most sovereigns, in different ways. Global monetary policy is easing in 2025-26, but fiscal and institutional difficulties are pushing up long-term yields. Advanced economies' interest costs are rising, exposing sovereigns with shorter maturity profiles such as the US to potentially higher refinancing costs. Emerging economies are issuing more non-USD debt which can reduce FX risk although in some cases with higher overall debt costs. Restricted financing options and funding conditions push up frontier markets' liquidity risks, but creditor cooperation can bring relief.

>> What could change the outlook. Less policy uncertainty would boost investment and economic growth, stabilizing the outlook. Faster than expected AI-related productivity gains, bolstering economic activity, would also help sovereigns regain lost fiscal space. Lower short and long-term interest rates would provide fiscal relief, but they would need to be accompanied by policies addressing entrenched economic and fiscal difficulties.

Executive Summary

Global Emerging Markets 2026 Outlook - Shifting domestic policies and geopolitics are main risks to stability

Emerging market (EM) macroeconomic and credit conditions have been resilient this year, and we expect they will remain so in 2026. Several interrelated—sometimes unpredictable— developments will influence these conditions, with the potential for pockets of stress.

>> Geopolitical and policy shifts ripple across EMs. EM 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. And societal opposition to new and existing policies will continue pushing some EM governments to prioritize social stability over long-term reforms.

>> Local currency markets and alternative financing vehicles are growing. US policy rate cuts, increased investor risk appetite and a weaker US dollar, along with interest in diversifying away from the US, will continue to spur capital inflows to EMs. This will further the growth of local currency bond markets, which have expanded rapidly over the past decade. 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.

>> Artificial intelligence and data centers bring potential for both growth and disruption. Technological advances are likely to exacerbate differences between EMs and advanced economies, and across EMs. Early adopters will benefit as innovation and efficiency boost productivity, investment and corporate earnings, and ultimately support economic growth. But new technology ventures also bring execution, cyber and social risks. Data center growth will continue in response to AI and cloud computing demand.

>> Costly natural disasters strain households, businesses and governments. EMs tend to be more exposed to extreme weather events than advanced economies, but have fewer resources for adaptation and resilience. Investment is far below what is needed given competing priorities and financing hurdles. Nearly half of EM sovereigns have high or very high credit exposure to physical climate risks such as floods and hurricanes, but relatively weak fiscal strength, limiting their ability to address these risks.