The turn of the global interest-rate cycle, underlined by the US Federal Reserve’s 50bp Federal Funds target rate cut in September, should ease foreign-currency debt-repayment burdens and refinancing challenges for many emerging market (EM) issuers, says Fitch Ratings.

Fitch expects the US rate-cutting cycle to be modest compared with historical cycles. However, we still expect to see 25bp rate cuts by the Fed in November and December, and 100bp of cuts in 2025. We also expect the European Central Bank to cut rates by 25bp in December, and by 100bp in 2025.

This should reduce global benchmark borrowing costs, easing liquidity and funding conditions for EM borrowers, particularly those with high dependence on foreign-currency debt. However, marginal borrowing rates for many in 2025 may still be higher than their current effective cost of borrowing, implying overall interest costs could still rise.

Lower US interest rates should create space for domestic monetary easing in many EMs, providing support to EM economic growth prospects, as well as reducing repayment burdens for issuers that have borrowed on domestic debt markets. Nevertheless, lower rates may hit net interest margins and earnings for EM banks, depending on individual banks’ sensitivity to interest-rate movements.

Fitch’s investment-grade EM issuer outlooks continued to skew Negative, partly to reflect our Negative Outlook on China’s sovereign rating which influences many China-based issuer profiles that are driven by sovereign support assumptions. Among sub-investment-grade EM issuers, the share of the portfolio on Positive Outlook fell to 11.6% in 3Q24, from 18.6% in 2Q24. This reflected in part the significant number of sub-investment-grade EM issuers that were upgraded in 3Q24, realising the potential for positive rating action captured in the outlooks.

Related Content: Global Emerging Markets Quarterly Credit Brief – 4Q24

The report, “Global Emerging Markets Quarterly Credit Brief – 4Q24”, can be found at www.fitchratings.com or by clicking on the link above.