Emerging markets debt 2026 outlook

Emerging markets defied expectations in 2025 amid a surprisingly favorable global environment and several historically troubled economies enacting significant structural reforms. Our Franklin Templeton Fixed Income team share their 2026 outlook for emerging market debt and assess whether these positive trends will continue.

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Summary

The past year has proved considerably more supportive for emerging markets than we expected at the outset. We started the year with concerns about the direction of US trade, immigration and foreign policy, and the challenges these changes would pose for emerging markets (EM) in terms of growth and investment. And indeed, we have had a year of substantial change in US trade, immigration and foreign policy. As we discuss in this paper, we find ourselves entering 2026 with a decidedly better macro environment for EM and an asset class that has proven far more resilient to disruption and more capable of positive reform than we expected to see at the start of the year.

Our base case for 2026 is a broadly constructive one. On the sovereign side, we anticipate some space for further spread tightening on credit-enhancing fiscal and economic reforms, and we expect to see a macro environment that continues to be supportive, while on the corporate side we see a more balanced fundamental outlook leading to a continuation of the range trading.

We acknowledge a key risk to that outlook is the potential for missed expectations in artificial intelligence (AI) development and infrastructure investment or further stressors emerging within private credit markets (or both) to disrupt risk sentiment. But even so, we see a strong case for a sustained stretch of positive reform momentum to underpin relative resilience in EM debt.

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Originally Posted December 18, 2025 – Emerging markets debt 2026 outlook