According to Fitch Ratings, the outlook for many emerging markets is declining as a result of the US-Iran conflict, which has disrupted oil supplies and adversely affected banks in the Philippines and Sri Lanka. The ratings agency noted that a growing number of sector assessments in global emerging markets are being classified as ‘deteriorating’ due to the ongoing war.
Fitch highlighted the Asia-Pacific region’s significant reliance on oil and gas imports from Gulf Cooperation Council (GCC) nations, making it particularly vulnerable to supply interruptions. This vulnerability is expected to have negative macroeconomic repercussions, particularly for the banking sectors in the Philippines and Sri Lanka. While sector liquidity remains stable due to financing activities prior to the conflict, the outlook for the GCC corporate sector is also deemed ‘deteriorating’ because of increased geopolitical risks, diminished tourism and transportation activity, rising supply chain costs stemming from the closure of the Strait of Hormuz, and an anticipated slowdown in the real estate market.
The uncertainty surrounding potential agreements to extend the ceasefire between the US and Iran and to reopen the Strait of Hormuz adds to the challenges faced by sovereign nations. These countries are experiencing the spillover effects of conflict, which are impacting economic growth, inflation, and bond yields.
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In their latest report, Fitch observed that approximately one-third of their sector outlooks for emerging markets in 2026 are now categorized as ‘deteriorating’, a notable increase from just 13% in their initial assessment made in December 2025. This change follows a mid-year update in 2026, where 17 outlooks were downgraded while only two were upgraded, excluding structured finance assessments. The remaining outlooks are classified as ‘neutral’.
The agency adjusted the sovereign sector outlooks for regions including Asia-Pacific, the Middle East and North Africa, and Sub-Saharan Africa to ‘deteriorating’. Greater China was the exception, receiving a change to ‘neutral’ due to strong export performance and signs that deflationary pressures are easing. This resilience also improved the outlook for China’s banking sector, shifting it from ‘deteriorating’ to ‘neutral’.
Despite these improvements in China, the broader Asia-Pacific area remains heavily reliant on oil imports from GCC countries, which exposes it to potential supply disruptions. This is reflected in the negative outlooks for the banking sectors in the Philippines and Sri Lanka, as well as for companies in the region.
The GCC corporate sector faces challenges from geopolitical instability, a decline in tourism and transport, increased supply chain expenses due to the Strait’s closure, and predictions of a slowdown in real estate activity. Nonetheless, liquidity within the sector remains satisfactory due to prior financing arrangements.
Fitch also lowered the outlooks for the banking sectors in the Middle East and Turkey to ‘deteriorating’ based on expectations of slower GDP growth, which may exert additional pressure on asset quality and profitability. However, access to markets has proven to be more resilient than anticipated. Additionally, the outlooks for Saudi and Turkish non-life insurance sectors were adjusted to ‘neutral’ and ‘deteriorating’, respectively.
Latin American sovereigns generally maintain a stable position due to favorable initial macroeconomic conditions and policy buffers. The overall sovereign sector outlook for this region remains ‘neutral’. However, the banking outlooks for Brazil and Colombia were downgraded to ‘deteriorating’ due to declining asset quality and political instability. The retail sector outlook for Latin America was also lowered to ‘deteriorating’ as operating conditions across the region weaken.
In Eastern Europe, where geopolitical risks are already elevated, the sovereign sector outlook continues to be ‘deteriorating’. Fitch downgraded the finance and leasing companies’ outlook in the region due to a challenging macroeconomic environment.
Despite the broader negative trends, there were no sector outlooks solely related to emerging market issuers that showed signs of improvement. The global Oil & Gas sector outlook, however, was upgraded to ‘improving’ from ‘neutral’ due to rising hydrocarbon prices. The benefits for GCC producers are contingent upon their ability to operate independently from the Strait or access alternative routes. In the Asia-Pacific region, pure refiners with benchmark-linked margins and minimal retail price risk are better positioned than integrated fuel marketers, who face challenges from delayed cost adjustments and increased working capital pressures.
It is important to note that sector outlooks differ from rating outlooks. The impact of the US-Iran conflict has stalled upward momentum for ratings in some emerging markets, although ratings have remained largely stable overall. Instances of negative rating actions among GCC corporates and banks have been mostly restricted to Rating Watch Negative placements on affected Qatari issuers and a few UAE homebuilders.
A comprehensive list of the mid-year 2026 sector outlooks is available through Fitch Ratings.
