Global Macro Outlook and Emerging and Developing Economies (2025)

The global macro cycle and especially the U.S. policy mix will prove to be a drag on emerging and developing economies, while the latter will remain at risk of experiencing further financial distress in the medium term, which, broadly speaking, will also raise the risk of domestic political instability. After more than a decade of ultra-low global interest rates and quantitative easing in the wake of the 2008 global financial crisis, significant flows of capital to emerging and developing economies. Low-income and lower-middle income economies have historically relied on official bilateral and multilateral financing, leading to Paris Club led restructuring. The tightening cycle was cut short by COVID-19, which lead for interest rates to effectively fall to zero and advanced (and even some non-advanced) central engaging in renewed quantitative easing, which effectively contributed to lowering long-term interest rates and support capital flows. The most recent tightening began in the wake of post-COVID-19 recovery, supply chain disruption, Ukraine energy shock and pent-up demand leading to most dramatic spike in inflation in more than forty years in advanced economies. As a consequence of economic shocks and higher borrowing costs, many especially developing economies experienced financial distress and several defaulted on their debt and/ or were forced to apply for IMF support. Sovereign distress, default and restructuring is only one variety of financial distress an economy can experience. Banking crises are another important source of financial instability. The past five years saw significant financial distress, particularly in low income countries, including several sovereign defaults. The economic shock related to COVID-19, higher U.S. interest rates and a stronger dollar led to financial distress in many developing economies, particularly in so-called frontier markets.

> In the past five years, the following countries have defaulted on and/ or were forced to restructure their sovereign international debt: Belize, Zambia, Ecuador, Argentina, Lebanon and Suriname. Argentina pre-emptively restructured its debt in 2020.

> According to the Bank of England default database, ten sovereigns accounted for 75% of the US-dollar value of debt currently in default globally (mainly Russia and Venezuela). the level of global public debt in default has averaged between 0.3% and 0.6% over the past decade, and currently stands at 0.5%.

The shift in U.S. economic policy will prove challenging for highly-indebted, low-income countries, as global interest rates will remain comparatively high, the dollar strong, the economic outlook (outside the United States) uncertain and the political-economic outlook fraught with risk. Adverse global economic and financial conditions, particularly in context of potentially inflationary and expansionary U.S. macroeconomic and trade policies, higher U.S. interest, rates, a stronger dollar, and lower dollar commodity prices could make things worse and lead to renewed financial, economic and domestic political distress in emerging and developing economies. An uncertain economic outlook in China due to structural and cyclical challenges as well as risks related to a conflictual U.S. economic policy toward Beijing has the potential to negatively impact low-income economies. Lower Chinese demand for commodities due to a move away from real-state and infrastructure-intensive growth and a reduced willingness to provide financing to low-income countries will negatively affect the economic and financial outlook. Emerging economies have generally solid economic fundamentals and sufficiently flexible policy regimes to limit the risk of a systemic financial crisis, including external debt defaults. Low-income countries have far greater financial vulnerabilities. Among emerging markets, Argentina, Ecuador as well as Pakistan face more significant financial challenges. But they also stand to benefit from IMF support, which means that if they follow IMF-prescribed policies in the context of an IMF program, they should be able to avoid another round of severe financial distress.

> The U.S. dollar on a trade-weighted basis. U.S. interest rate outlook has been revised upward in recent months in light of slow disinflation and risk of inflationary U.S. macroeconomic and trade policies. U.S. interest rates will decline only very modestly if all this year. Some market analysts even predict that the Federal Reserve may be forced to raise interest rates.

> Argentina, Ukraine, Egypt, Ecuador and Pakistan are the largest recipients of IMF loans, largely on account of their economic size. However, the bulk of countries receiving IMF support in the context of balance of payments problems is located sub-Saharan.

> Low-income, developing countries, including frontier markets, are most at risk of financial distress in light of significant bilateral and private external borrowing. Ghana and Zambia have just emerged from sovereign default. 

A significant number of mostly low-income countries (developing economies), as opposed to higher-middle income countries (or emerging economies) face various degrees of financial distress, including balance-of-payments problems, and are undergoing IMF-supervised economic adjustment. Short of a detailed economic, political and financial analysis of individual cases, sovereign credit ratings are an acceptable, if imperfect indicator of economic and financial risk in a country. However, they can and do sometimes miss risks, including non-sovereign financial risks. But broadly speaking, sovereign credit ratings (see table) seem strongly correlated with economic development and per capita income. Low-risk countries (rated A or higher) are largely advanced economies; the medium-risk category (rated BB or BBB) is dominated by emerging economies; the high-risk category consists mostly of low-income countries. A more fundamental reason why medium-term risk countries are less at risk than high-risk countries is their lower level of dollar-denominated risks, more independent central banks and more flexible exchange rates, which makes balance-of-payments more manageable. Often, they also benefit from a larger domestic investor base and stronger institutions. THis is not to suggest that countries like Brazil, Mexico, South Africa or Turkey will not face more challenging financial conditions, but they are unlikely to experience sovereign distress or external payments defaults in the next few years. 

> As of 2023, IMF estimated that share of developing economies in distress. It estimated that 25 percent of emerging and developing economies were at high risk and faced “default-like” spreads on their sovereign debt, meaning their ability to raise (or refinance) international debt was severely curtailed. About 15 percent of low-income countries were in debt distress, and an additional 45 percent are at high risk of debt distress. While some of these low-income countries are undergoing IMF-supervised definition and/ or have emerged from a debt restructuring, risks remain elevated, particularly in view of a worsening global macro environment. 

> A consequence of U.S. financial sanctions, Russia’s sovereign default (2022) was involuntary, while Ukraine’s default was largely the consequence of the war. Ukraine has successfully restructured (part?) of its private external debt, but not its official debt. 

> Ghana, Sri Lanka, Zambia have restructured their debt and continue to make progress on broader economic adjustment with fair prospect of regaining market access at the end of the IMF program. Argentina needs to secure an IMF agreement and move towards greater exchange rate flexibility to sustainably reestablish the equilibrium of its balance of payments. Lebanon and Venezuela (Republic and PDVSA) remain in default

An adverse macro environment and significant economic and financial vulnerabilities in low-income countries will keep the risk of political instability high, regardless of whether countries default and restructure their or avoid a debt restructuring but undergo significant policy adjustment. Domestic political instability often accompanies IMF programs, as policy adjustment and conditionality in the form of a tighter monetary policy, currency devaluation and fiscal adjustment, whether tax increases or expenditure, including subsidies cuts, prove deeply unpopular against the backdrop of initially often weak economic growth and high inflation. Opposition parties and where applicable coalition parties often have an incentive to criticize adjustment policies in view of the next elections, further fueling opposition to adjustment and their short-term economic costs. To the extent that IMF programs contain structural conditionality it may also require politically painful structural reform, such as the privatization of state assets and opposition from concentrated, well-organized and often politically influential domestic political interests. However, an external debt default is typically even more destabilizing, economically and politically, as it sharply limits a country’s access to external financing and forces a precipitous contraction of imports on the country as well as a lack of access to long-term financing of investment. Often, but not always, a default is accompanied by banking crises or domestic government debt crises. Governments tend to not to survive the economic turmoil in the wake of a disorderly default, but debtor governments and their creditors often kick the proverbial can down the road for too long and then get forced into an even more disruptive disorderly financial default rather than a pre-emptive debt restructuring against the backdrop of IMF support. This dynamic will also contribute to further financial distress, including sovereign debt crises and possibly defaults, in low-income countries in the next few years. But even if outright sovereign defaults can be avoided, increased financial distress will put increasing stress on many countries in the high-risk category.

> The potential for (very) adverse spill-over effects from financial distress in emerging and developing economies is very limited, particularly compared to the 1980s and 1990s, when defaults threatened to bring down the U.S. banking system or destabilize U.S. financial markets (e.g. Long-Term Capital Management). Today, the financial importance of non-advanced countries in financial distress is very limited. The systemic financial importance of the countries in the high-risk category is negligible (see table). 

> It took Zambia (2020-24) four years to restructure its debt. Ghana (2022-24) and Sri Lanka managed to do in in two years. While three countries hardly makes a large enough sample, it is possible that future debt restructuring will be completed less slowly, though much will in practice depend on how messy a default is and how willing debtors are to While the G20 Common Framework and Global Debt Roundtable have not delivered, debt restructurings seem to be completed less slowly in the context of non-Paris Club creditors like China 

Political Economy of Fiscal Reform in Brazil (2025)

Brazil’s economic growth has outperformed expectations post-COVID-19, but this improved economic performance is unlikely to be sustained over the medium term due to continued low savings and investment After years of economic underperformance following the car wash scandal, economic growth has outperformed market economists’ expectations. Brazil’s economic fundamentals are relatively sound in terms of its international financial position, commitment to a floating exchange rate regime and the government’s net foreign currency creditor position, all of which mitigate the risks of a balance-of-payments or sovereign external debt crisis. However, domestic government debt is high and fiscal deficits are high, raising concerns about the medium- and long-term outlook for debt sustainability, and hence economic growth.

> According to the IMF, real GDP grew by 3% annually in 2022 and 2023, and it is expected to expand another 3% in 2024, supported by strong domestic consumption, increased agricultural and hydrocarbon output and a less than anti-cyclical fiscal policy. Real GDP growth averaged 0.5% a year over the past decade. According to the World Bank, real GDP per capita growth averaged a negative 1.6% annually.

> The Brazilian public sector is net foreign-currency creditor. Less than 5% of Brazilian public debt is foreign-currency-linked. Brazil’s international financing requirements are low and the central bank sits on $350 billion of foreign-currency reserves, while the current account deficit is more than fully financed by net foreign direct investment flows.

> Compared to the other two large Latin American economies, Argentina and Mexico, Brazil compares favorably in terms of long-term economic growth. In the past thirty years, both Argentina and Mexico registered real GDP growth of 2%, compared to Brazil 2.4%. Over the past decade, Brazil grew 0.5% annually, compared to Mexico’s 1.5%, while Argentinian real GDP did not grow at all.

While Brazil’s international financial position is very manageable, a modest medium-term growth outlook and adverse fiscal dynamics represent will sooner or later force the government to pursue a much more restrictive fiscal policy. While such an adjustment is necessary to ensure medium- to long-term debt sustainability, if would also, if implemented forcefully, help free up resources to be invested in the economy to raise medium-term growth. But this is unlikely to happen on a meaningful scale, as the Lula government is struggling to implement more decisive short- and medium-term fiscal adjustment, particularly in view of the 2026 presidential elections. The government has reformed the fiscal framework, but is struggling to take more decisive actions aimed at a fiscal adjustment in the short term to help stabilize the debt-to-GDP ratio. The government has also failed to address longer-term fiscal concerns related to high levels of education, health and pension spending, which will sooner or later prove unsustainable. Significant reform remains unlikely in the next two years.

> In 2023, congress approved a constitutional amendment replacing the zero cap on growth in real federal spending, which had been in force since 2016, with a corridor for real spending growth tied to both revenues and the difference between projected and targeted primary fiscal balances. The amendment re-established floors for mandatory education and health as well as investment spending. While the reform committed the government to improving the primary balance from -0.5% of GDP in 2023 to 1% of GDP by 2026, these are indicative targets only and can be changed with a simple majority vote in congress. Mandatory spending increases mean that the government is constantly struggling to mobilize greater revenues, while it limits the amount of money that can be spent on investment.

> Absent reform, public pension spending is projected to increase from 12% of GDP in 2016t to 16% in 2025 to 26% in 2050. This is not sustainable. Pension reform in 1998, 2003 and 2012 were insufficient to significantly impact the path of future spending. Adjusted for age, Brazil has the largest pension expenditure in the world, according to the IMF.

> The IMF projects gross government debt to increase from 85% of GDP in 2023 to 95% of GDP by 2027, which represents a substantial increase. The IMF also forecasts the structural primary balance to improve by 0.5 percentage points of GDP annually, which will likely prove way too optimistic. It also forecast real economic growth of 2.4% annually, which is way above the ten- and twenty year average of 0.5% and 2.3%.

Structural economic reform necessary to accelerate medium- to long-term economic growth is always difficult, particularly so in Brazil. Brazilian presidents typically face an unwieldly congress in several ways. First, the president’s own party generally controls an often miniscule share of seats in the chamber and the senate, forcing the formation of often disparate “presidential coalitions”. Second, the number of congressional political parties and hence congressional fragmentation is high, which further weakens the cohesion of presidential coalitions. Third, party discipline in Brazil is very low, largely due to an electoral regime that weaken party-political control of candidates and favor personalistic policies. More recently, changes to the way budget policy is implemented further has further weakened the president’s ability to win congressional support for a cohesive, long-term economic reform agenda. Finally, many important economic reforms require amendments to the constitution and this require super-majorities to pass them. This is not impossible, but does make it more difficult to pass reform legislation than in other countries. If Brazil fails to implement major spending reform, particularly pension and social spending, it will sooner or later fail to comply with its new fiscal framework and government debt will inevitably become unsustainable. It also means that the government will fail to mobilize the fiscal space required to increase investment and support medium- to -long-term economic growth.

> Consisting of 82 members, the Senate has 11 different political parties and groups. The high degree of fragmentation tends to limit the size of presidential coalitions. The government coalition consists of 42 senators. Consisting of 513 member, the chamber of deputies has 16 different parties and political groups. The government coalition consists of 225 deputies, falling short of an absolute majority, hence requiring wide-ranging compromise with independents or the opposition to pass legislation.

> Members of the chamber of deputies are elected on the basis of open list proportional representation, which gives voters extensive influence over who they elect and weakens party political control over candidates, leading to personalistic and clientelist politics. The centrao, the broadly centrist group of members of congress that lack ideological conviction or cohesion and engage in clientelist politics, is a reflection of the open list proportional representation. Senators are elected on the basis of a plurality regime, but due to weak national political parties and the senatorial candidates’ need to maintain close ties with and rely on state governments and governors (and their political machines) to be elected, they are similarly independent from the parties they represent.

> The Brazilian constitution established extensive social and economic rights, which require constitutional majorities to be amended. This is possible, particularly as far as it concerns minor issues, but it is generally politically challenging due to 4/5 super-majorities in both chambers.

Despite a surprisingly strong growth performance, the medium-term outlook remains challenging, not least because sooner or later Brazil will need to overhaul public finances. Over the medium term, the government will need to implement a more forceful fiscal adjustment to prevent a further increase in government debt, not least given the large social and pension obligations. A future government will implement reform only gradually in terms of the politics and economics. Politically, radical reform is politically very unpopular as it affected “acquired rights”, which often are grandfathered in. Economically and financially, the effects of reform are limited in the sense that they typically seek to prevent a further rise of pension spending rather than a decline in a context where spending is set to increase due demographic dynamics. This will also mean that Brazil will continue to be characterized by a low, perhaps even falling savings rate, which will constrain domestic investment, particularly in public infrastructure, and future economic growth. Other structural reform, such as greater trade integration, may support higher medium-term growth, but progress will be slow, while the international trade environment is set to worsen in the next few years in the context of the U.S. presidential elections. With major structural reform unlikely before the 2026 elections, Brazil’s economic performance is likely peaking and will deteriorate as 2026 approaches and beyond.

> According to IBGE, Brazil’s population currently at 216 million is projected to peak at 220 million in 2041 in the context of a rapidly falling fertility rate (falling from 2.3 in 2000 to 1.6 in 2023, and projected to reach 1.4 by 2040). The old-age dependence ratio increased from 10 in 2010 to 15 in 2023 and is projected to 36% by 2050. Brazil’s working-age population is estimated to have peaked in 2021 as share of the total population.

> Trade integration, defined as exports and imports of goods and services, Brazil ranks 184 out of 195 countries. Agricultural product and fuels and mining account for 75% of total exports, only 25% manufacturing. China accounts for 26% of exports, followed by 15% for the EU and 11% for the U.S. China accounts for 23% of all imports, followed by the U.S. with 19% and the EU with 16%.

> Federal capital expenditure typically amounts to less than 1% of GDP and the public sector is net dis-saver, meaning most public sector net borrowing finances non-investment expenditure. Public sector dissaving is the major cause of a low domestic savings ratio of less than 15% of GDP, and hence low investment.