Fitch warns of mounting EM credit risks from Hormuz, El Niño, tariffs

July 30, 2026 (MLN): Fitch Ratings has cautioned that the renewed closure of the Strait of Hormuz in July points to persistent geopolitical and energy-related risks for emerging markets credit through the second half of 2026, warning that additional shocks stemming from El Niño and US tariff policy could further strain policymakers' capacity to safeguard economic buffers.

The rating agency noted that the US-Iran conflict had contributed to a rising proportion of deteriorating mid-year sector outlooks across global emerging markets.

Fitch had already trimmed its 2026 growth projection for emerging markets excluding China by 0.2% to 3.2% in its June Global Economic Outlook, citing weaker prospects for net oil-importing economies such as India, Poland, South Africa and Turkiye.

On the climate front, Fitch said El Niño could pose significant risks to vulnerable emerging economies, potentially eroding agricultural output, stoking inflation, straining external accounts, raising the cost of food subsidy programmes and triggering hydropower shortages.

Separately, while emerging market issuers generally carry less direct exposure to the AI investment cycle than their developed-market counterparts, the agency observed that the broader AI investment boom had left capital markets more vulnerable to a potential correction, which could weigh on emerging markets through a broader pullback in global risk appetite.

On trade, Fitch said AI-linked exports had cushioned some emerging economies against rising US protectionism, though many remain vulnerable.

It noted that Washington had levied tariffs of at least 10% on 60 countries in July, following a 25% duty on imports from Brazil, a move that could intensify margin pressures and supply-chain disruptions for exporters caught in the crossfire.

The agency also flagged that a shift toward annual reviews of the USMCA trade pact, if drawn out, risked deepening uncertainty and holding back a recovery in Mexican fixed investment.

Despite these headwinds, Fitch said emerging market issuers' ratings performance had held up well so far, with upgrades outnumbering downgrades by a two-to-one margin in the second quarter of 2026.

However, the agency pointed to a negative shift in the Outlook balance, with 13% of Outlooks rated Negative against 8% Positive by the end of the second quarter, a shift it attributed partly to fallout from the US-Iran conflict.

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