1. Emerging Markets Regain Financial Resilience
After months of volatility, emerging markets (EM) are showing renewed external strength. According to TAC ECONOMICS’ September 2025 Monthly Comments, robust trade dynamics and stronger capital inflows have improved foreign-exchange (forex) reserves across most EM economies.
This trend has helped ease external pressures, even as global financial conditions remain uncertain due to US monetary policy and trade tensions.
The analysis shows that since April 2025, EM currencies and equity markets have rallied, reflecting better investor sentiment and stronger fundamentals.
2. The US Factor: A Softer Dollar, Rising Capital Flows
The US dollar weakened in Q2 2025, weighed down by slowing US growth and erratic trade policies. As a result, investors sought higher yields and diversification in EM assets.
From April to June 2025:
- EM currencies appreciated, benefiting from easing dollar pressures.
- EM stock indices surged to record highs, supported by renewed portfolio inflows.
This dual trend—currency appreciation and capital market recovery—translated into a significant buildup in foreign-exchange reserves across emerging economies.
3. Forex Buffers Strengthen Across Regions
By mid-2025, the aggregate import-cover ratio for the ten key emerging markets climbed to 11 months of imports, signaling improved external solvency.
China, in particular, saw its forex reserves reach USD 3.2 trillion in August 2025—the highest level in a decade.
These rising reserves reflect not only strong exports but also the positive balance of payments across most EM regions. Export volumes have continued to outpace import growth since mid-2023, reinforcing current-account surpluses.
4. A Closer Look: The Quality of Reserves
However, TAC ECONOMICS warns that not all reserves are created equal. While forex liquidity indicators remain favorable overall, the quality of reserves has declined.
In early 2025, the forex reserves quality index fell below the neutral threshold, highlighting that recent accumulation is driven primarily by short-term capital inflows rather than sustainable trade surpluses.
This reliance on volatile capital can expose EM economies to financial shocks if global sentiment shifts—especially if US interest rates rise again or risk aversion increases.
5. Payment Risk Ratings Improve
Despite this nuance, TAC ECONOMICS’ Payment Risk Rating, which measures countries’ external solvency, improved across most emerging regions.
- The average Payment Risk Rating for 100 EM economies dropped by more than 5 points between 2024 Q2 and 2025 Q2 to 42.4, marking the lowest risk level since 2018.
- Asia and Europe now approach the low-risk category (below 40).
- Countries like Poland, Indonesia, Thailand, and Vietnam are among the top performers, while others such as Argentina, Nigeria, and Chile continue to struggle with high risk levels.
This broad-based improvement underscores stronger external positions and lower transfer risk for international investors and businesses operating in EM.
6. What Lies Ahead
While the outlook for emerging markets’ forex resilience is encouraging, TAC ECONOMICS cautions that the composition of reserves matters. Dependence on short-term capital inflows could increase financial volatility if global risk sentiment deteriorates.
Still, the structural improvement in external solvency and diversified capital flows suggest that many EMs are better equipped to navigate shocks than in previous cycles.
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