The Week Ahead - Special Edition: Assessing EM Sovereign…

PodcastThe Week AheadThomas RookmaakerOct 14

Fitch’s sovereign-rating assessments point to varied pressures across emerging markets: geopolitical exposure weighs on the Baltics, while governance and inflation remain concerns for Turkey. Across Asia-Pacific and Central and Eastern Europe, fiscal strain, external resilience, growth prospects, and policy credibility shape outlooks, with country-specific developments outweighing global shocks in many cases. Fitch also highlights major fiscal challenges in Poland, Hungary, and Romania, alongside growth and debt trade-offs in India, the Philippines, and Indonesia.

Emerging Markets Risk Management Government Debt

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Key Takeaways

Fitch says Asia-Pacific outlook changes have increased after a period of stability, driven mostly by country-specific developments rather than global shocks. Credit conditions are mixed: stronger external finances, particularly in North Asia and among sovereigns benefiting from the AI boom, contrast with broader post-COVID public-finance deterioration and rising government debt-to-GDP; improved external finances supported upgrades for Sri Lanka and Pakistan.

Public-finance strains and political obstacles to adjustment are weighing on several Central and Eastern European sovereigns. Poland’s spending rose from 42% of GDP in 2019 to 51% in 2025, including a defense-spending increase from 2% to nearly 5%; Fitch is also watching Hungary’s plan to cut its deficit from 7.5% to 3% by the end of the decade and whether Romania can sustain a projected deficit decline from 9.3% in 2024 to below 6% this year.

Fitch’s country assessments show different growth and fiscal trade-offs across Asia: India’s close-to-7% growth, recovering private investment, and improved fiscal transparency support its positive outlook despite very high debt and the highest interest-payments-to-revenue ratio among investment-grade sovereigns. By contrast, Fitch’s negative outlooks on the Philippines and Indonesia reflect concerns about growth potential, investment or policy consistency, and—in Indonesia’s case—the feasibility of the 8% growth target, although Fitch says its credit metrics have not materially changed.

GEO-POLITICS

Baltic Risk — Fitch says the Baltics are most vulnerable to geopolitical risk because of their size, proximity to Russia, and exposure to a potential Russian threat. It subtracts one notch from its model-predicted rating to reflect that risk.

“Based on fish assessment, we have identified the Baltics have been the most vulnerable to this geopolitical risk because of its size, proximity and vulnerability to potential, you know, a…”—

Turkey Governance — Fitch says Turkey’s fund crisis did not spill over to other parts of the financial sector or reverse recent de-dollarization. But it highlighted governance erosion since 2018 as a factor that could weigh on the country’s rating trajectory.

“I think, you know, the policy response has managed to contain the damage or contagion to other parts of the financial sector…”—

ECONOMY

APAC Outlooks — Fitch says Asia-Pacific ratings were stable after the post-COVID downgrades until roughly one to two years ago, when outlook changes began to increase. It attributes those changes partly to global shocks but mostly to country-specific developments. Fitch also subtly changed its outlook definition to signal that a rating may change.

“In APAC between the, you know, the downgrades following the COVID shock and say one to two years ago. So we have seen a number of outlook changes…”—

CEE Outlooks — Poland, Hungary, and Romania have negative outlooks, with pressure on investment-grade sovereigns tied to public-finance strains and political challenges to taking action. Positive outlooks for Armenia and Serbia reflect, respectively, high growth and reserve accumulation, and good growth prospects, declining debt, and improved external resilience.

“So we have currently three sovereigns in CEE on a negative outlook. That's Poland, Hungary, and Romania…”—

Asian External Finances — Fitch says Asian sovereigns generally have relatively strong external finances, particularly in North Asia. Sovereigns benefiting from the AI boom are seeing further strengthening.

“I think it's generally fair to say that Asian sovereigns have relatively strong external finances, particularly in in North Asia and you know those sovereigns benefiting from the AI boom…”—

MARKETS

Turkey FX Buffers — Fitch says Turkey’s fund outflows did not increase FX demand enough to reverse recent de-dollarization. Reserve buffers rebuilt since the start of the Iran war remained relatively resilient.

“We've seen that the outflow of funds has not translated in increased FX demand that will lead to a reversal in terms of de dollarization that we've seen in recent…”—

Emerging Market Rating Pressures

Fitch describes more frequent outlook changes as responses largely to country-specific developments, with Asia showing varied external resilience and broad fiscal deterioration.

Eastern Europe Outlooks

Fitch links negative outlooks in Poland, Hungary, and Romania to fiscal strain and political challenges, while positive outlooks reflect country-specific growth, reserve, and external-resilience strengths.

Baltic Geopolitical Exposure

Fitch says defense spending contributes to fiscal pressure, but other spending is also important; the Baltics face the greatest geopolitical rating vulnerability, while hybrid activity is not yet a downgrade trigger elsewhere.

India And Malaysia Prospects

India benefits from strong growth, investment, and transparency reforms but remains constrained by high debt and interest costs; Malaysia's growth and foreign investment are offset by gradual fiscal consolidation.

Hungary And Romania Deficits

Hungary's outlook depends on a credible plan to reduce its deficit, while Romania's recent fiscal progress must be sustained despite weak growth and political uncertainty.

Philippines And Indonesia Risks

Fitch sees Philippine growth weakness as a threat to debt stability and Indonesia's outlook as reflecting policy uncertainty, even though its current credit metrics remain broadly steady.

Turkey Governance And Inflation

Turkey's contained fund outflows have not undone reserve resilience, but governance erosion and persistently high inflation remain major constraints on a sustainable rating improvement.

Thailand Outlook Stabilization

Fitch moved Thailand's outlook to stable as resilience, stronger fiscal outcomes, and improved confidence in the government's ability to pursue medium-term policy support debt stabilization.