IMF slashes emerging market outlook amid funding squeeze

Washington — The IMF has cut its 2025 growth outlook for emerging economies, including Mexico and China, warning on Tuesday that tighter funding conditions and a scarcity of development cash could inflict pain on developing nations.

Waves of tariffs announced by the Trump administration, as well as policy uncertainty, are expected to affect global growth just as the world economy emerged from major shocks such as the fallout from the Covid-19 pandemic and Russia’s invasion of Ukraine.

In its World Economic Outlook, the IMF lowered its economic growth forecasts for emerging and developing economies for 2025 and 2026 to 3.7% and 3.9%, respectively, shaving off about half-a-percentage point on its January estimates. The latest forecasts mark a sharp slowdown from the estimated 4.3% growth for 2024.

“At this juncture, while the situation remains fluid, risks remain firmly tilted to the downside,” the IMF said.

Among individual countries, Mexico saw its growth forecast slashed by 1.7 percentage points and was now expected to see its economy, which is tethered to the US, contract 0.3% this year.

China’s forecast was lowered by 0.6 percentage point, and by almost the same amount next year. The world’s second-largest economy has found itself in the White House’s crosshairs for trade levies.

An outlier, Russia’s 2025 growth forecast was raised 0.1 percentage point to 1.5%, but that is a sharp slowdown from 2024’s estimated 4.1% GDP growth. Its deceleration is a key driver for slower expansion in emerging Europe, which is predicted to stand at 2.1% this year and 2026.

Fiscal space for many emerging economies was much tighter than a decade ago, while the amount spent on debt servicing out of fiscal revenues is rising.

“The resilience shown by many large emerging market economies may be tested as servicing high debt levels becomes more challenging in unfavourable global financial conditions,” the IMF report said.

Though servicing costs remain below pandemic levels in countries that borrowed under favourable conditions during Covid-19 times, having to roll over in times of rising borrowing costs would see effective rates surpass them, especially in low-income countries.

Many of them already faced a squeeze from the drying up of concessional and development financing.

“More limited international development assistance may increase the pressure on low-income countries, pushing them deeper into debt or necessitating significant fiscal adjustments, with immediate consequences for growth and living standards.”

The Trump administration is pushing for a sea change on development finance, dismantling the US Agency for International Development while countries from France to Britain have also reduced their support.

Reuters