August 2026 EMD review and outlook: central banks, crude and carry

Signs of softening in the US labour market weighed on the greenback, with the US Dollar Index falling 0.49% over the month, providing a supportive backdrop for emerging market (EM) assets. Meanwhile, the ongoing US-Iran conflict kept oil prices elevated, with Brent crude ending the month 0.4% higher at $90.1 a barrel. While elevated Treasury yields continued to pose a headwind for EM debt, the impact was largely offset by dollar weakness and constructive risk sentiment.

Sentiment softened towards the end of the month, after US Federal Reserve (Fed) Chair Kevin Warsh pushed back against expectations for near-term rate cuts, driving short-dated Treasury yields higher and increasing market expectations of a September rate hike. Nevertheless, EM debt generated positive returns, supported by a resilient risk appetite and favourable carry.

Issuance takes a season pause

Sovereign primary markets put on the brakes, with no new issuance, consistent with the seasonal slowdown typically observed during the month. Activity is expected to pick up in September, with both Pakistan and Saudi Arabia announcing plans to access the market. Despite the August pause, year-to-date sovereign issuance remains robust at US$191.5 billion. Corporate primary market issuance remained active in August, with US$22 billion of issuance, primarily from Asia (US$17.9 billion), notably India and Singapore.

Hard currency sovereign debt posted positive returns in August, with the JP Morgan EMBI Global Diversified Index rising 0.89%. Spread returns led the outperformance, contributing 0.72% while Treasury returns added a further 0.17%. High yield spreads tightened 13 basis points (bps), carrying on the compression from July, while investment grade spreads also tightened by a further 6bps. At the country level, Venezuela (+5.61%) led performance as the country reached an oil agreement with the US, followed by Lebanon (+4.04%) and the Republic of Congo (+3.02%). Argentina was the weakest performer in the Index, dropping 3.06% as inflation and growth expectations weakened.

Local currency (LC) debt delivered positive returns, with the JP Morgan GBI-EM Global Diversified Index (unhedged, US dollar terms) gaining 0.90%. Foreign exchange (FX) drove returns, contributing 0.66%, local rates added a further 0.24%. Turkey was the strongest performer both in LC and US dollar terms, returning 5.35% and 3.77%, respectively as the central cut its repo rates by 300bps and expectations of further easing continued to rise. Colombia was the weakest performer, falling 1.36% in LC terms, as fiscal deficit projections widened for 2026 and 2027 from 7.2% of GDP to 9.3% of GDP.

Energy firms remain in the ascendency

EM corporates netted positive returns, with the JP Morgan CEMBI Broad Diversified Index rising 0.62%, primarily driven by spread returns of 0.39% while Treasuries added 0.22%. High yield corporates outperformed, returning 0.84% alongside 6bps of spread compression. Investment grade corporates gained 0.46%, with spreads tightening 5bps over the month. Both Azule and Kosmos Energy reported strong second-quarter results, supported by higher realised oil prices and increased production. Azule benefited from key projects and strong free cash flow generation, while Kosmos continued to make progress on production growth.

Country stories worth watching

In Venezuela, a new oil agreement with the US government was reached, which targets the development of more than 65 million barrels of oil production across 17 strategic fields over the next 25 years. Authorities estimate the project could generate US$209 billion in tax revenues, which can potentially provide substantial support for the fiscal and external accounts.

In Brazil, the easing cycle continued after the central bank cut the Selic rate by 25bps at the August meeting. However, sentiment remained constrained by concerns over the fiscal outlook as policy plans remain increasingly scrutinised ahead of the October elections, with questions around the sustainability of fiscal consolidation remaining a key focus.

The central bank in Hungary lowered interest rates by 25bps to 5.5% as July inflation fell to 1.2% year-on-year from 1.7% in June. The government also announced meeting all conditions required for the disbursement of EU Recovery and Resilience Facility funds, potentially unlocking up to €10 billion in financing.

In Colombia, a broader sell-off in was trigged by the new government’s proposed US$197.5 billion 2026-2027 budget, which pointed to wider-than-expected fiscal deficits of between 7.2% and 9.4% of GDP, implying substantial financing needs in the medium term. A downgrade to growth projections to 1.8% from 2.2% further weighed on sentiment, reflecting the anticipated impact of El Niño.

Romanian fiscal reforms remained in focus after the government failed to pass public sector reforms required under the EU framework, which could cost Romania roughly €770 million in funding. This development raised concerns about the pace of fiscal adjustment and the country's ability to meet commitments linked to the EU funding arrangements.

The Lebanese parliament advanced the implementation of the bank resolution law, representing further progress towards IMF-backed reforms. However, the World Bank has projected economic growth would contract by 6.4% in 2026, reversing the stabilisation seen in 2025 and highlighting the continued challenges facing the country’s recovery.

In Indonesia, the proposed 2027 budget draft unveiled the government’s US$230 billion budget plan, targeting a budget deficit of 2.4% of GDP, down from 2.85% of GDP in 2026 with a 6% growth target. The announcement supported sentiment as Indonesian bonds and the rupiah strengthened, although scepticism remained on the government’s broader growth target.

Senegal was downgraded by Moody's to Caa2 from Caa1, with the negative outlook maintained, reflecting rising refinancing pressures and an increased risk of default. The IMF also concluded a mission to Dakar and announced a US$2.2 billion, 36-month programme.  However, funding is contingent upon the government making its debt sustainable, underscoring the Fund’s implicit backing of a debt restructuring.

Elsewhere, Moody’s upgraded Benin to Ba3 (stable outlook) from a B1, highlighting stronger growth forecasts and progress in strengthening public finances. Fitch also upgraded the Republic of Congo to a CCC+ from a CCC, as financing conditions have improved and arrears are expected to decline, while S&P upgraded Tajikistan to a B+ citing strong the economic growth and an improved current account position.

Outlook: value remains in several areas

We continue to see value in EM hard currency debt, particularly across high yield and frontier issuers. Credit fundamentals have improved, with declining default risk as most high-yield issuers have regained market access and rating trajectories remain broadly positive. While spreads are relatively tight, our base case assumes limited further compression. Frontier markets continue to benefit from restored access to external financing for most issuers, while elevated headline yields provide a cushion against downside risks, particularly for energy-linked credits. 

In EM local markets, real yields remain attractive relative to developed markets, while FX volatility has fallen to historically low levels. Against this backdrop, EM corporates continue to exhibit resilient credit fundamentals, supported by conservative leverage, healthy interest coverage and historically low default rates. Technical conditions also remain favourable, with constrained net supply reflecting the continued focus of issuers on balance sheet discipline and debt reduction. This combination of solid fundamentals and supportive market technicals leaves EM corporates well positioned, with attractive carry continuing to underpin the risk-adjusted return profile.

The key risk to this constructive outlook is a prolonged conflict in the Middle East, particularly if tensions continue to escalate and trigger a broader risk-off move across global markets. Elsewhere, developed market fiscal sustainability could continue to place upward pressure on global yields, tightening financial conditions and increasing refinancing costs for lower-rated issuers. Ongoing uncertainty around US trade, foreign and monetary policy also remains a source of volatility for EM assets, while a significant correction in developed market risk assets could weigh on investor sentiment and lead to a repricing of EM risk premia. In addition, El Niño-related weather disruptions could weigh on growth and add to inflationary pressures. As the likelihood of a Fed hike continues to increase, these risks could be compounded if global interest rates remain higher for longer.