The rule that has governed global finance for forty years has been that when something breaks, money leaves the developing world. It happened in 1994, in 1997, in 2008, in 2013 when the US Federal Reserve merely hinted at slowing its bond purchases, and again after 2020, when the COVID pandemic shock pushed Zambia into default that November, and Sri Lanka and Ghana into default two years later.

By that rule, 2026 should have been a bloodbath. A war that began in late February has effectively closed the Strait of Hormuz, the passage that carried roughly a fifth of the world’s oil. Brent crude has traded near USD 89 a barrel in mid-August, up about a quarter on pre-war levels after touching USD 110 earlier in the year.

Fertiliser prices have followed, and behind them food. The yield on the 10-year US Treasury note, the number against which almost all developing country borrowing is priced, sits near 4.65%, against 3.97% before the fighting started. Traders have spent the summer arguing not about how quickly the Fed will cut rates, but whether it will have to raise them.

The rule did not hold. Institute of International Finance data shows foreign investors put USD 214.4 billion into emerging market debt in the first seven months of 2026, against USD 177.7 billion in the same stretch of 2025, the strongest run in more than two decades.

Governments have exploited the appetite. Roughly USD 19 billion of sovereign bonds were sold in July alone, about twice the average for that month over the past ten years, taking issuance for the year to a record USD 187 billion.

Something has changed, and it is worth being precise about what.

The comparison that flatters the developing world

Ask whether emerging economies have handled geopolitical disruption better than rich ones and the honest answer is that they have handled their own balance sheets better, which is not quite the same thing.

The IMF’s April 2026 Fiscal Monitor put global public debt just under 94% of GDP in 2025, on course to cross 100% by 2029, a year earlier than the fund projected only twelve months previously. The accumulation is driven overwhelmingly by the largest economies.

On the fund’s April World Economic Outlook database, US general government gross debt is projected at 126% of GDP this year and 142% by 2031, the biggest absolute increase in the advanced world. Japan sits above 200%. Twenty-three economies now carry gross debt above 100% of output, and the list is dominated by rich countries, not poor ones.

Set against that, the emerging market picture looks almost conservative. Central banks across Latin America, Asia and Africa spent the 2022 to 2024 inflation shock raising rates early and hard, which left them with real yields that are genuinely positive, and room to cut when their advanced counterparts have none.

Reserve buffers are thicker. Central bank independence, which was a slogan in the 1990s, is now closer to institutional fact in Brazil, Mexico and South Africa.

Ratings agencies have noticed. Pakistan, Ghana, Ecuador, Nigeria and Argentina have all collected upgrades. Oman and Azerbaijan have reached investment grade. Fund managers report the strongest upgrade momentum among lower rated sovereigns in over a decade, an unusual thing to say in a year of war.

Political risk, meanwhile, has migrated. The disorder that investors once priced into Latin American and African assets now shows up in a record US government shutdown, fractured European coalitions, and defence spending commitments that nobody has explained how to fund.

The growth arithmetic points the same way. The IMF’s July update expects emerging market and developing economies to grow 3.8% this year and 4.5% in 2027, against 1.7% and 1.8% for advanced economies. Global growth of 3.0% in 2026 recovering to 3.4% in 2027 is what the fund calls a V shaped path around the war shock.

The caveat matters, though, and it is a heavy one. The World Bank’s June Global Economic Prospects cut its global forecast to 2.5% for 2026, the weakest since the pandemic, and downgraded two-thirds of economies. South Asia, the fastest growing region, decelerates from 7% to 6.3%.

Low-income countries manage 5.4%, three-tenths lower than previously expected, with fertiliser driven food inflation doing much of the damage. Most sobering, the bank calculates that by 2028 developing economies other than China and India will have spent nearly a decade making no progress at all in closing the income gap with rich countries.

So, the financial resilience is real. The developmental resilience is not. Bond markets and living standards have decoupled, and anyone reading the inflow numbers as evidence of broad-based prosperity is reading them wrong.

Why the money is moving

For a decade-and-a-half, global portfolios were built on a single assumption, that American assets were the default, and everything else was a satellite allocation. That assumption is being quietly unwound.

The IMF has begun writing about the erosion of the US Treasury’s safety premium in its own fiscal surveillance. Investors who spent 2025 watching the dollar post its sharpest annual fall in eight years have concluded they are over allocated to one jurisdiction, and, in a fragmenting world, they want to be spread across many.

The mechanics reinforce the mood. For Japanese and other Asian institutions, hedging US Treasuries back into home currency now wipes out most of the yield, which makes local Asian bonds structurally more attractive than they were.

Emerging market debt was yielding around 6.9% in February, against roughly 4.2% for US bonds and 3.6% globally. Rising Treasury yields have narrowed that gap since, but not closed it.

The pull side is the story of a decade of quiet plumbing work. Emerging economies have built domestic capital pools deep enough to reduce their dependence on foreign money altogether.

Local currency sovereign bonds outstanding totalled roughly USD 13 trillion by the end of 2024, against about USD 1.4 trillion of international hard currency sovereign debt, according to research from JP Morgan and UBS. Large economies, such as Brazil and South Africa, now fund themselves overwhelmingly at home, in their own currency, from their own pension funds and insurers.

That changes the physics of a shock. When foreign investors sell, domestic institutions are on the other side of the trade. Fund managers describe the result as an absence of the liquidity crunches that used to define emerging market sell-offs. Prices fall, but the market does not gasp.

Positioning is the third leg. After what Bank of America’s head of emerging market fixed income strategy David Hauner, speaking to Reuters, called the ‘valley of tears’ running from roughly 2015 to 2025, a stretch of strong dollar, US exceptionalism, and serial defaults, global investors are still structurally underweight.

Emerging economies hold about 60% of the world’s population and produce around 40% of global output, yet account for barely a tenth of the MSCI All Country World Index. Several months of inflows barely dent a decade of under-investment.

There is a risk buried in the composition of the money, and the IMF flagged it in April. Portfolio flows to emerging markets have risen eightfold since the global financial crisis to about USD 4 trillion in cumulative terms.

Portfolio debt liabilities now average around 15% of GDP, against roughly 9% in 2006. About 80% of that capital comes from non-banks, twice the share of twenty years ago, and non-bank money is faster money.

Private credit in emerging markets, opaque by design, has grown fivefold in a decade to somewhere between USD 50 billion and USD 100 billion. Deeper markets have not abolished the sudden stop. They have changed who would cause one.

Safe haven, or simply the least crowded trade

The safe haven question deserves a careful answer, because the marketing departments have got ahead of the evidence.

A true safe haven does two things. It holds value when everything else falls, and it stays liquid when liquidity vanishes. Emerging market assets do neither reliably. What they have done in 2026 is something narrower and still significant. They have offered diversification at a moment when the traditional refuges look compromised.

Look at the split inside the flows. While USD 214.4 billion went into debt, roughly USD 86 billion came out of emerging market equities in the same seven months, nearly ten times the outflow at the same point in 2025. This is not a wall of money buying an asset class. It is a discriminating reallocation into yield, and away from concentrated technology risk.

The performance record is similarly mixed. The JP Morgan GBI-EM Global Diversified index of local currency debt lost 2.25% in the first quarter as the dollar strengthened on safe haven demand, then gained 3.85% in the second.

An index of inflation linked emerging market local currency government debt has returned 11.3% this year, against 1.5% for the broader local debt index, and a small loss for the Bloomberg Global Aggregate. The winners are specific, not general.

Currencies tell the same story. Emerging market currencies erased their 2026 gains by the start of July as speculation about higher US rates revived the dollar. Capital Economics’ aggregate currency risk indicator has nonetheless stayed near multi-year lows, which is the more interesting fact. Currencies weakened without anyone fearing a crisis.

The deepest evidence for a structural shift comes from official reserve managers rather than fund managers, though it needs reading carefully. The dollar’s share of global reserves has fallen from roughly 71% in 1999 to 57.1% in the first quarter of 2026.

That latest reading, however, was up from 56.4% three months earlier, and the IMF is at pains to point out that much of the recent movement reflects exchange rate valuation effects rather than central banks actively selling dollars.

Intent shows up more clearly in what reserve managers say and in what they buy instead. In the World Gold Council’s 2026 survey, 74% of central banks expected the dollar’s share to be moderately or significantly lower within five years.

Official gold buying ran at an estimated 244 tonnes in the first quarter, ahead of both the previous quarter and the five-year average, with Poland the largest single purchaser.

Central banks are not calling emerging markets a haven. They are calling the ‘Old Haven’ crowded, and looking for anything neutral. Emerging market debt is one beneficiary of that search. Gold is the bigger one.

Professional investors are behaving accordingly. Several large houses, BlackRock’s investment institute among them, have cooled on emerging market equities and hard currency debt even as flows continue.

Managers describe themselves as highly selective, ignoring benchmarks, avoiding countries with debt problems and skipping those where yields no longer compensate. That is not haven behaviour. It is careful, well-paid risk taking.

What the institutions are actually saying

The IMF’s July update describes an economy pulled by two crosscurrents, a war shock that punishes energy importers and vulnerable states, and an AI investment boom that lifts anyone plugged into the technology value chain.

Global disinflation has stalled. Headline inflation is expected to rise from 4.1% in 2025 to 4.7% in 2026 before easing to 3.9% in 2027, with energy and food doing the work.

The Fiscal Monitor adds the geopolitical arithmetic. IMF staff estimate that a one standard deviation shock to their geopolitical fragmentation index is associated with public debt ratios rising about 1.5 percentage points of GDP over the medium term. Fragmentation is not an abstraction. It has a price, it is paid in borrowing costs, and it is being paid now.

The World Bank supplies the development warning. Its June report is explicit that emerging economies unable to build the ecosystem and policy environment for wide AI adoption risk falling further behind, and that private investment growth in developing economies has been declining since the 2000s even as public balance sheets improve.

The US Energy Information Administration expects Brent to average USD 87 a barrel across 2026 and does not see Middle East production returning to near pre-conflict levels until early 2027.

The IEA has warned of the widest global supply deficit in five years. For oil importing developing economies, that is another eighteen months of imported inflation.

Fund managers add the risk nobody controls. The threats most often named to the flow story are not war headlines but food prices, fertiliser costs, and El Nino. A drought does more damage to a frontier sovereign’s fiscal position than a missile does.

The next shock is already priced, badly

If the world has survived geopolitics, artificial intelligence (AI) is the test that has not yet started. And the strange thing about emerging markets in 2026 is that they are simultaneously the most exposed and the least prepared.

Start with the index. As of July 31, information technology accounted for 40.8% of the MSCI Emerging Markets Index. Taiwan is the largest country weight at 26.6%, China 21.4%, and South Korea 20.3%.

Taiwan and Korea together are almost half the benchmark. In January those weights were 21% and 15.7%, with technology at 30.3%.

India, meanwhile, has slid from roughly 20% of the index in mid-2024 to under 12%. Its equities are down around 5% in local currency terms this year, with the Sensex at 77,728 on August 17, having lagged badly through the first half before a July rally that pulled about USD 1.6 billion of foreign money back in. Expensive crude and a weaker rupee did most of the damage.

The emerging market equity benchmark is now, to a first approximation, a leveraged bet on the AI semiconductor cycle.

That has been enormously profitable. It also means every boom and bust in AI sentiment transmits straight into an asset class marketed as diversification. Korea’s Kospi moving 3.7% in a single session on AI earnings is not an emerging market story at all. It is a Silicon Valley story with a Seoul postcode.

Then there is the labour market, where the exposure runs the other way. IMF research puts around 40% of global employment in occupations exposed to AI, rising to 60% in advanced economies but sitting at 40% in emerging markets and 28% in low-income countries.

The fund’s 2026 work on new job creation finds AI related skills appearing in almost 5% of US job postings by 2025, with incidence in emerging economies roughly half that.

The comfortable reading is that developing economies face less immediate disruption. The correct reading is that they face less immediate disruption because they have fewer of the cognitive jobs that AI both threatens and rewards, and they are much less equipped to capture the productivity gains.

The IMF’s AI Preparedness Index, which covered 174 economies when it was published in 2024, places India at 0.49 against 0.77 for the US and 0.80 for Singapore. Bangladesh scores 0.38.

For countries whose development model runs through services exports, business process outsourcing, back-office work, entry level coding and customer support, this is the central strategic question of the next decade, and it is barely being discussed in the same rooms where capital flows are celebrated. Cheap labour was the comparative advantage. AI attacks precisely the tasks that made it valuable.

The economies best placed are the ones already inside the hardware chain, Taiwan and Korea above all, along with the handful of middle-income economies drawing data centre investment on the strength of cheap power. The ones most at risk are populous middle-income countries with young workforces, thin digital infrastructure, and social safety nets designed for a different century.

What to watch out for

The bull case for emerging markets rests on three things holding. That the Fed does not have to raise rates. That Hormuz reopens before food inflation does structural damage to importing sovereigns. That the reallocation away from American assets is a strategic decision rather than a carry trade wearing a strategic costume.

The first two are out of the hands of finance ministries from Accra to Jakarta. The third is not. Governments that use this window to extend maturities, deepen domestic investor bases, and build the digital and educational infrastructure that AI adoption requires, will look, in five years, as though they earned something.

Those that simply enjoy the cheaper borrowing will find out that the oldest rule in global finance was not repealed in 2026. It was merely suspended.

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According to a report published by Climate Bonds Initiative, issuers in the region have contributed 2 percent of global green bond issuance volume last July. The report found that Brazil accounts for 48 percent of total Latin American green bond issuers—with Chile and Mexico at 16 percent and 13 percent respectively.

Even though other economies such as Europe dominate the green bond market, Latin America is relatively new with massive potential for growth. The year 2017 proved to be remarkable for Latin America’s green bond market, with issuance of around $4 billion in the region. However, the market slumped significantly in 2018, contrary to the global market record. It is noteworthy that despite sluggish growth in 2018, Brazil ranked among the top 10 emerging markets in green bond issuance for a cumulative period between 2012 and 2018.

Sovereigns expected to see massive growth
The green bond market in Latin America is largely dominated by corporate issuance. The number of government-issued bonds or sovereigns has been relatively low in comparison to bonds issued by non-financial corporates. The corporates have been quite strong in the region but they vary in degrees between different countries.

In Brazil, for example, most of the markets are dominated by non-financial corporates. That said, Argentina is dominated by local governments while Costa Rica is by government-backed entities. So there are big differences with public-sector domination seen in some countries.

Thatyanne Gasparotto, analyst at Climate Bonds Initiative told International Finance, “We have been anticipating the arrival of sovereign issuance in the region. And when Chile came out, it sent a signal to a lot of other countries and they began exploring the possibility of issuing sovereigns. We have seen some countries already expressing it publicly, like Mexico showcasing its STG framework, just a couple of months ago. Also, Columbia is looking to do the same.”

Another analyst believes sovereigns will grow in Latin America as governments try to build green infrastructure and align with the climate goals. Miguel Almeida, analyst at Climate Bonds Initiative, told International Finance, “Other countries have already signaled potential sovereign green bonds such as Mexico, Peru, and Columbia. So we are not just expecting sovereigns to grow, but also, depending on the country, some local governments and developed banks issuing more.

Bruno Bastit, an analytical director at S&P Global, in an interview with International Finance, was asked whether sovereigns are set to grow in Latin America in the coming years. His quick response to the questions was “Yes we do.”

Bastit said “Chile has been leading the way so far, issuing the first euro-denominated sovereign green bond in the region, and we expect other countries to follow suit. Indeed, we’ve seen some positive developments coming from the governments of Colombia, Costa Rica, or Mexico. Several Latin American countries, including Chile, have announced their intention to achieve net-zero emissions by 2050, and green bonds would play a crucial role in achieving this objective.”

Energy, transport and land use space to issue green bonds
It is important to note that green bond issuance in Latin America is highly concentrated in terms of countries, issuers and sectors. A majority of the issuances have been directed toward finance projects in energy and transport sectors.

Almeida said the energy sector really dominates in Latin America. “This is because if you include Chile’s green sovereigns, which is mostly financed clean transports. Most of the funds were for Santiago’s metro infrastructure, so they are related to transport. However, if we remove the sovereign from the equation, energy really dominates,” he explained. “Also, we have quite a big deficit for building projects, when compared to the global market, in addition to waste and water infrastructure. Looking forward, there is a really big need to finance low carbon infrastructure in the region and that will involve more projects related to transport in other countries apart from Chile. And even then waste management and water infrastructure management has to be greener.”

Another powerful sector in the region is land use and is mostly related to forestry and paper. In fact, Brazil has a huge agricultural production.

Gasporotto explained that the big distinction between Latin America and the rest of the world when it comes to green finance is the land use space. She said “I would say that is the big difference when compared to Europe, say for example, which has a very large low carbon building stock. However, this doesn’t mean Latin America won’t get there. It’s just how the economies are structured and where the low hanging fruit is. I wouldn’t say it is on the low carbon building side at the moment, but rather in the land use space. We began to see that with the forestry issuances and now we are moving into bio-energy which has picked up pace.”

Effects of Covid-19 on green issuance in Latin America
An unprecedented event like the Covid-19 pandemic has pushed the global economy into a state of recession. The International Monetary Fund (IMF) claims that the impact of Covid-19 will be more severe than the 2008 financial crisis.

In this context, Almeida spoke from a data perspective on how the pandemic will affect the green bond market. “The level of issuances has decreased a lot since early March. What is happening is on the flip side other labels are increasing in usage, especially social bonds to finance projects related to healthcare. We don’t really expect it to be a substitution between the two, it is more about issuing bonds that can cover social-environmental aspects.

Especially when it comes from the public sector where they might have very different types of projects they can’t finance, issuing a sustainability or STG bonds, that pace is really what’s gonna pick up in the medium term.”

Thatyanne too agrees with Almeida. “I think we had a decrease in issuances overall, and this is not in particular to green. And what’s interesting to see is that the investor’s appetite has no gone away, the limited green issuances that have come out when we look at the global market has really been successful in light of the lack of products in the market and investors continue to signal that they do want to see green labelled bonds with transparency and clear use of proceeds,” she said, From Thatyanne’s standpoint, there are other challenges, such as domestic complexities, in countries like Brazil which have very specific regulations in issuing sovereigns.—and the capitalisation of plans will be complicated with the pandemic. “Let’s just say that Chile issuance was a benchmark and since then a lot of countries have started looking at it.”

The biggest complexity for Latin America has been around currency depreciation during the crisis. In many countries there was already a downward trend before the pandemic occurred and the situation has now worsened. The region mainly takes debt in US dollars with Brazil being an exception.

Currency depreciation has, in some ways, complicated the economy to continue accessing international capital markets more frequently. “I would say it’s a constraint on the capital market side effects Latin America more than other regions in the world and obviously green goes with that,” Thatyanne said. “But the silver lining is that investors really want green so what we are working here in the region is to promote green stimulus packages which could be an alternate source of financing for these economies in the near future in light of the crisis.”
Bastit, on the other hand, explained that the Covid-19 crisis has led to a slowdown in emissions. It appears that there have already been some notable issues in the first quarter of the year from corporates in Brazil and Uruguay in the pulp and paper and energy sectors. Besides corporates, possible sovereign issuances throughout the region may actively help to support that growth.

Trillion dollar infrastructure to be built in the coming decade
It is a known fact that green bonds in Latin America is a new market. In the region, Mexico and Brazil were the sole markets initially, but in the last year and a half other countries such as Columbia, Chile and Costa Rica, for example, have decided to test the market and are anticipated to see major issuance in the coming years.

“In Latin America, however, most of the infrastructure stocks are yet to be built. So there is an opportunity to actually derisk from a project finance point. In that regard, we have just a massive pipeline of investments in the trillions of dollars of infrastructure that needs to be built in Latin America over the next decade,” Thatyanne said. “So I would say that especially in the green finance space, where investors are looking at that type of assets and in Latin America we have an endless pipeline to offer. Now in terms of financial profile, the risk will be the same.”

In addition, Bastit said “One trend we have seen with green bonds investors is a higher level of scrutiny of issuers’ corporate practices to ensure some coherence between green bonds and the environmental profile of that entity.”

More Latin American countries to foray into green bonds
The current crisis is creating a lot of uncertainty which might impact the green bond market and the situation is being closely monitored. Nevertheless, the region’s outlook remains positive “as we see a growing interest from both investors and issuers, sovereign and corporate alike in green and sustainable debt instruments,” Bastit explained.

“I think there is a lot of room to grow for Latin America. I would probably say all the main countries in the region have either issued or developed initiatives around sustainable finance and with even a highlight for Central America and the Caribbean, with smaller countries, which could be a challenge to access international capital markets,” Thatyanne said. “Also, so much has been done with the regulation and stock exchange level with Panama, Costa Rica, for example. We think it’s all very new and the region is just starting to tap the potential. I think more countries are coming into the fold. So far, 11 countries have entered the market and a good two odd countries are yet to enter.

“Looking forward, I would say diversification of both issuers and asset categories. There is a lot of potential in the land use space as well. Energy is natural to keep growing because renewable energy is very big in the region and will continue to grow. I also think the market is highly concentrated in Latin America. In Brazil, we have a lot of non-financial corporates, financial corporates in Columbia, we have sovereigns in Chile. I think that concentration would begin to dissolve over the next few years as the market reaches out to other types of players.”

Miguel expects more Latin American countries to be added to the mix in the coming years. When it comes to the development of green finance, the same trends apply but to different degrees. It often happens that when one country starts doing things differently the trend is followed by the rest creating competitive pressures which together in the specific region will allow the market to develop in many ways.

“We have seen many countries issuing green bond guidelines and wider sustainability bond guidelines to develop the market in their respective countries. So the ecosystem infrastructure for more issuers to come in is also important. There are some organisations which are working, also stock exchanges, for example, CFE in Mexico or green finance council in Brazil allow more issuers to come into the market where there is more info available and support as green bond issuance has different requirements,” Miguel explained. “We expect to see infrastructure growth when it comes to transport and agriculture. There is also a potential for blue economy projects. These are related to the sustainable use of ocean resources such as fishing, marine renewable energy like offshore wind and tidal wave energy. And also in Latin America, there are a lot of oil-producing countries and many countries have very big coastlines.”

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