Dispatch from Bangkok: resilience, uncertainty and muddling through

Over the past week, we were in Bangkok for our semiannual pilgrimage to the IMF-World Bank meetings where we held over 50 meetings with finance ministries, central banks, multilateral officials and peers in the financial sector. On the global macro front, the mood remained one of uncertainty. While the global outlook has remained relatively resilient in the context of ongoing wars in Russia-Ukraine and the Middle East, it is evident that geoeconomic fragmentation and growing fiscal challenges, alongside the AI boom, are beginning to weigh. Benefitting from their recent history of prudent policies, emerging markets continue to muddle through the shocks.

How far can resilience go?

The overall mood in past meetings has been one of uncertainty with no strong views from either officials or investors. This repeating pattern began in April 2022 with Russia’s invasion of Ukraine, followed by uncertainty ahead of the US elections in October 2024, the Liberation Day shock in April 2025 and the start of the Middle East conflict in April of this year. This has limited visibility on macroeconomic indicators and increased the perception of downside risks globally. All this is compounded by rising concern around AI adaptation, and its financing needs, greater uncertainty over the Fed’s reaction function and fiscal worries in developed markets.

Yet, the word of the week was ‘resilience’. This October’s World Economic Outlook: , calls attention to how the global economy has withstood shocks, attributing it to: first, the rerouting and substitution of energy supplies, and energy efficiency; and second, the AI investment cycle. However, the IMF calls attention to the limits of this resilience, and the limited policy space that exists globally to continue constraining the energy crisis’s global repercussions.

Furthermore, borrowing costs have become more binding in advanced economies, and at the same time, global investment expansion has become more concentrated on the tech sector. Energy inventories are dwindling and new shocks risk adding further strain on global commodity markets. In this context, the risk remains that fiscal deficits will further weigh on monetary policy, creating a feedback loop which hurts asset prices and further restrains government balance sheets ahead of future shocks.

There is also the concern around the global economy now running through a more concentrated set of chokepoints. Hormuz showed how a single strait can move global inflation, and nothing guarantees that the next disruption will be absorbed as smoothly. Taiwan's dominance in advanced chips is the technological equivalent, and the AI boom has made it more critical, not less, as technology investment concentrates risk in a small number of firms, sectors and economies. Countries do not need to bring entire supply chains home to gain strategic agency; they need to control, or at least insurance against, the points where those chains can be cut.

What does this mean for emerging markets?

For EMs, increasing risks test their improved resilience to global shocks, which we discussed after last year’s Annual Meetings. EM policy frameworks have moved markedly the right way over the past two decades. More EMs have now incorporated fiscal rules, have independent central banks and target inflation. Many central banks have responded to the global crisis with interest rate hikes; multiple EM central bankers reinforced the importance of frontloading hikes to ensure expectations remain anchored and to mitigate second-round effects, even under a supply shock. Fiscal prudence is a more difficult challenge, as many low-income countries continue to subsidise fuels. Nevertheless, external balance sheets remain controlled, but as the shock persists this can change.

Furthermore, it has become increasingly apparent that emerging markets no longer move as a single asset class. Emerging Asia’s story centres on countries’ positions in the AI supply chain, energy dependence and exposure to Chinese competition. With inflation under control, policy debate increasingly focuses on currencies and capital flows. Central and Eastern Europe’s stories are domestic: deficits, politics and fiscal credibility. Poland and Hungary run deficits of 7% to 7.5% of GDP, Romania has a twin deficit, inflation is stickier than in Asia, and the outlook depends more on elections, EU funds and defence spending than the global tech cycle. Latin America and Africa depend on both domestic and external factors. In Latin America, pro-market governments are attempting fiscal consolidation to build credibility, while central banks follow idiosyncratic cycles and commodity prices remain important. Africa is similar, with Nigeria and South Africa undertaking significant structural reforms. Nigeria benefits from higher oil prices, while South Africa is more balanced between gains from higher mineral prices and the drag from higher fuel prices.

Latin America, reinforcing a commitment to continuous prudence

Latin American officials reinforced their comparatively more favourable fiscal conditions and policy orthodoxy as factors supporting resilience set against an uncertain external backdrop. Much attention was paid to Brazil, where right-wing candidate Flavio Bolsonaro is expected to win Brazil’s runoff vote on 25 October. Markets, ourselves included, expect he will tackle, even if to a limited extent, Brazil’s fiscal deficit, opening the door to a reduction in inflation expectations and further central bank cuts. In Colombia, the challenge is similar, with President Abelardo de la Espriella targeting a 2.2% fiscal consolidation, though we believe the ultimate result will be much more modest. Mexico’s challenges are more focused on its monetary policy, where the majority of the central bank still looks to cut rates once more this year, adding to FX risks as it diverges from Fed policy in the context of a historically tight interest rate spread. Lastly, Argentina remains at the forefront of investor attention ahead of next year’s elections, with the threat of dollarisation risking a comeback. Ultimately, Latin America also remains resilient because of its growing commodity exports, improved trade diversification and integration in global supply chains, in addition to its distance from geopolitical conflicts.

Asia - winners and importers

Within Asia, the AI supply chain separates the winners from the rest. Korea's real income is rising 15.6% on chip prices, Malaysia grew 6% in the second quarter with inflation below 2%, and Vietnam is now adding genuine value rather than simply assembling. Yet being a winner carries risk. Some USD 1.4 trillion of revenue commitments now flow through circular deals between hyperscalers and weaker AI firms. If those funders slow, chip exporters will feel it first. Nor is the windfall reaching households: Korean consumption is forecast to grow just 2.3% this year, while Malaysian employee compensation is only about 32% of GDP, the region's lowest, showing that growth is not feeding through to wages.

Energy importers with external deficits, notably the Philippines and India, sit on the other side, with currencies doing the adjusting. The rupee has approached 97 to the dollar, prompting another bazooka package while balance of payment pressures persist, and the Indonesian rupiah briefly hit 18,000 again this week. Yet inflation passthrough is low or falling across most of the region, so central banks are managing the pace of depreciation rather than fighting its direction, increasingly through forwards and swaps rather than spot sales. The same oil shock has produced a hawkish central bank in Manila, where inflation is 7.2% and the current account deficit reached 6.4% of GDP in the first half, and a dovish one in Bangkok, where subdued inflation and a below-potential economy keep hikes off the table. The quieter risk is funding: global capital is chasing AI equities and US assets, while foreign holdings of government bonds have fallen in the Philippines and Indonesia. Countries improving market plumbing, as the Philippines is doing through fewer, larger bond lines and a push for index inclusion, will fare better than those waiting for flows to return. Longer term, China+1 means adding production nodes rather than exiting China, favouring countries that add real value or offer a large domestic market, like India, where net FDI is recovering.

Central and Eastern Europe - three countries, three directions

In Central and Eastern Europe, three large economies are diverging. Hungary is the positive surprise: its new government has secured agreement to unlock EUR 16.4bn of EU funds; we expect front-loaded fiscal consolidation from a 7.5% deficit and see room for rating upgrades on the road to the euro. Poland combines strong growth and a defence build-up towards 5% of GDP with a 7.1% deficit, an election next year and conflict over its central bank governor. Fundamentals are sound, but the policy mix is becoming more political. Romania is the weakest link, with a twin deficit, a caretaker government since May, falling foreign holdings of local bonds and a leu down about 5% this year. A snap election won by the nationalist AUR would, in our view, be very damaging for its debt.

Africa: idiosyncrasies

Sub-Saharan African countries represent the broader EM story of resilience. After the Covid-19 shock the continent experienced a wave of sovereign debt restructuring, but subsequent reforms have given Africa more fiscal space, and higher commodity prices have supported exporters’ balance sheets. South Africa is undergoing a process of structural reform but faces fuel price pressures. The SARB has been active in fighting inflation through rate hikes, with the door open for more to maintain credibility as it recently revised down its inflation target. Meanwhile, the country’s treasury is set to introduce a new fiscal anchor in coming days, supporting prudence. Nigeria, meanwhile, has been the big position for EM investors, supported by markedly improved fundamentals through structural reforms undertaken by the Tinubu administration, falling inflation, a unification of the FX regime and the support of high oil prices, strong exports and lower imports, creating a very resilient base of international reserves. Ghana and Zambia’s stories have been supported by improved fundamentals as well, while Senegal is undergoing a so-called ‘debt treatment’ in the context of a pending IMF program, being the one concerning story of the region.

Overall, despite resilience, global risks will continue to strain global economies. The environment reinforces the importance of bottom-up analysis and being selective, favouring strong fundamental stories with credible fiscal and monetary policies, and strong external balance sheets.