Emerging Markets Face New Credit-Downgrade Era, S&P Global Warns

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(Bloomberg) — The Middle East war risks ending a run of net credit-rating upgrades across emerging markets and could trigger a new downgrade cycle as it fuels inflation and tightens financial conditions, S&P Global Ratings Director Ravi Bhatia said.

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The warning comes as an energy shock ripples through developing economies, after disruption along a key oil shipping route sent oil prices soaring, raising costs for energy importers such as India, Turkey and Kenya. Even exporters are bracing for fallout as higher prices globally weigh on growth, stoke inflation and curb tourism.

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The shift would mark a reversal from the past three years, when many emerging markets repaired balance sheets, implemented fiscal reforms and regained market access after the pandemic triggered widespread defaults and rating cuts. Falling defaults across sovereigns and companies helped drive a net upgrade cycle in 2024 and 2025. A prolonged Iran conflict could now tilt the balance back toward downgrades.

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“Last year we saw inflation falling and credit conditions easing, leading to net upward rating pressure across Middle East and Africa sovereigns,” Bhatia said. “However, in 2026, given the new conflict in the Middle East, inflationary pressures are expected to rise, and financing conditions will become more challenging for the MEA region, raising potential downside risks.”

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Emerging-market sovereign dollar bonds returned about 52% between October 2022 and February 2026 as post-pandemic fiscal reforms helped resolve most debt defaults, attract foreign inflows and compress risk spreads. Three years of declining defaults pulled African sovereigns out of distress and fueled rallies in previously distressed issuers such as Lebanon and Ukraine.

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That momentum has reversed over the past four weeks after Iran moved to constrain the Strait of Hormuz — a route for about 20% of global energy exports — in response to attacks by the US and Israel. Brent crude traded at $115 a barrel on Monday, up from $72.48 before the war.

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Bloomberg’s index of emerging-market sovereign dollar bonds is heading for its biggest monthly loss since September 2022, with average yields rising 66 basis points in March. A JPMorgan Chase & Co. gauge shows risk spreads widened by 21 basis points.

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While higher oil prices boost revenues for exporters and strain importers, the inflation shock and tighter financing conditions will weigh on all countries, Bhatia said.

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