Emerging Market Currencies to Watch

US Dollar-denominated corporate bond yields in emerging markets have increased across all income levels since the pandemic. Yet, the rise is generally comparable to or smaller than that observed in advanced economies. On average, yields have climbed from 4.8% in December 2019 to 6.4% in September 2024.

Let's discuss how these emerging market (EM) currencies are going to perform in 2025. 

Brazil to navigate a hawkish turn

Brazil's central bank took a notable divergence from other emerging markets by raising the Selic rate to 10.75% in late September, responding to currency weakness and concerns over inflation pass-through. With inflation close to target levels, this hawkish move signals the central bank's caution in anchoring inflation expectations amidst external pressures. Market projections suggest rates may climb to 11.75%–12% before easing begins.

Political dynamics have also stabilized as President Lula da Silva softened his critique of the central bank's policies. This reduction in political tension supports confidence in Brazil's monetary framework, but challenges remain. Higher interest rates could temper economic growth, placing additional pressure on policymakers to balance stability and momentum.

Brazil's economic path will likely depend on its ability to maintain investor confidence while managing inflation and currency stability. A return to easing in 2025 could foster growth, but timing will be critical to avoid undermining inflation control. For stakeholders, this presents both opportunities in Brazil's financial markets and risks tied to potential volatility.

Mexico's path to easing

Mexico is navigating a delicate monetary transition as the Bank of Mexico (Banxico) adopts a more cautious easing approach. After reducing rates twice in 2024—from 11.25% to 10.75%—the central bank is expected to implement further gradual cuts in late 2024 or early 2025. This measured approach reflects a balance between curbing inflation and supporting economic growth, especially as inflation remains slightly above target.

President Claudia Sheinbaum's strong endorsement of Banxico's independence during her inaugural address ensures political stability for the central bank, a critical factor in maintaining investor confidence. However, Mexico remains exposed to external pressures, including US monetary policy shifts and potential changes in trade dynamics.

As easing continues, the focus will be on sustaining growth without reigniting inflation. Mexico's steady monetary approach offers a degree of predictability for businesses and investors in a turbulent global environment. Coupled with its strong trade links and geographic advantage, Mexico could emerge as a stable regional investment hub.

India to balance inflation and growth

India's Reserve Bank (RBI) is striking a delicate balance as its repo rate is steady at 6.5%. Despite declining inflation, periodic spikes in food prices have complicated the timing of potential rate cuts. The RBI is expected to signal easing in early 2025, prioritizing economic growth as it navigates global challenges and a domestic recovery.

India's economic trajectory remains promising, driven by resilient domestic demand and an expanding global presence. However, structural vulnerabilities, including food inflation and external trade pressures, require careful management. Policymakers will need to address these challenges while fostering a supportive monetary environment for investment.

For investors, as rate cuts take effect, sectors reliant on domestic consumption and capital investment could see significant gains.

APAC's overall steady growth 

Asia-Pacific (APAC) is expected to maintain steady economic growth in 2025, bolstered by robust domestic demand and the gradual easing of monetary policies. While growth rates in China and India may decelerate slightly, they remain among the strongest globally. In China, challenges in the property sector and lingering trade tensions with the US weigh on economic momentum. 

However, ongoing fiscal and monetary interventions aim to mitigate these effects. India's economic prospects remain buoyant, supported by household consumption and global supply chain diversification efforts. Southeast Asian economies, like Vietnam and Indonesia, stand to gain from these trends as firms increasingly seek alternatives to China-centric production. 

Additionally, technological adoption and infrastructure investments continue to drive growth in APAC, reinforcing the region's role as a key engine of the global economy. Despite external risks, including geopolitical uncertainties and trade policy shifts, APAC's economic fundamentals remain strong, supported by resilient domestic markets and strategic policy measures.

Saudi Arabia: growth driven by economic diversification

Saudi Arabia's economy is set for growth in 2025, underpinned by its ambitious Vision 2030 agenda. The kingdom's efforts to diversify its economic base away from oil dependence yield significant results, with investments in tourism, renewable energy, and technology sectors driving expansion. Large-scale projects like NEOM and initiatives to boost non-hydrocarbon industries are attracting substantial foreign and domestic investments. 

These developments are complemented by a stable macroeconomic environment, supported by prudent fiscal policies and strong public sector initiatives. Higher demand for commodities tied to the global energy transition further bolsters revenue streams. 

While regional tensions remain a risk, Saudi Arabia's proactive policies and strategic partnerships position it to navigate potential challenges effectively. Its focus on structural reforms and economic diversification ensures a more resilient and sustainable growth trajectory.

Turkey and Russia: slower growth amid structural challenges

Economic growth in Turkey and Russia is expected to decelerate in 2025 due to ongoing structural and geopolitical challenges. In Turkey, tight monetary policies aimed at curbing inflation have dampened domestic demand, with high borrowing costs and persistent fiscal imbalances constraining growth. While export sectors offer some relief, structural reforms are needed to sustain economic stability. 

Meanwhile, Russia continues to face the dual pressures of sanctions and geopolitical isolation, which limit access to global markets and investments. Although higher energy prices provide temporary fiscal support, long-term growth is hampered by a lack of economic diversification and limited foreign direct investment. 

Addressing underlying vulnerabilities, including inflation control and fiscal discipline, is critical to fostering a stronger economic environment for both countries. These challenges underscore the differentiated growth dynamics within emerging markets, highlighting the importance of tailored policy responses.

What's in for emerging markets moving forward?

In 2025, emerging markets will likely see mixed performance. Brazil's hawkish stance and political stability may balance inflation and growth, while Mexico's cautious easing could support stability. India's domestic demand offers growth potential despite inflation risks. APAC, led by India and Southeast Asia, will drive steady global growth, while Saudi Arabia gains from diversification. However, Turkey and Russia face structural and geopolitical hurdles, limiting growth prospects.