Trade war hits emerging market growth, weaker dollar eases some risks

Bamidele Famoofo

Emerging-market (EM) issuers are variously exposed to direct and indirect impacts from the global trade war, Fitch Ratings says in a new report. Credit pressures may become most evident in EMs where tariff effects combine with aggravating factors or add to pre-existing pressures, even if direct US tariff exposures are small.

APAC’s high trade openness and exposure to US demand leave it particularly exposed to direct tariff risks, but all regions will be affected, with Fitch expecting global growth to fall below 2% this year. We forecast Chinese growth to be below 4 per cent this year and next, and US growth to slow to a crawl over 2025.

Potential aggravating factors include separate US policy changes such as reductions to foreign aid spending and immigration policy changes. The impact on commodity prices and hence growth and fiscal revenues will be an important transmission channel to credit metrics in exporting EMs, as in previous global shocks, while potentially easing external liquidity pressures on some oil importers. We lowered our 2025 Brent oil price assumption to USD65/bbl in April from USD70/bbl.

Higher US Treasury yields and constraints on US monetary easing heighten risks to the international financing environment. However, the unexpected weakening of the US dollar means that the risk that exchange rate depreciation could increase the debt burdens of some EM sovereigns with a large share of foreign-currency debt has not yet materialised. The dollar’s fall has also created more space for deeper rate cuts by EM central banks.

US tariff increases will disrupt corporate supply chains and affect earnings. The impact could be material for some national sectors including Chinese homebuilders, Mexican building materials and diversified industrials, and Latin American airlines.

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