EM Momentum, DM Fatigue: 2025 IMF Fall Takeaways

The Emerging Markets Debt team just returned from 2025 IMF Annual Meetings, seeing finance and central bank officials, and market participants. Your authors have been reporting on these meetings for three decades, so there will be meta-observations as well.

Key Takeaways:

• AI-driven capex is extending U.S. growth, tempering stagflation fears but keeping inflation risks alive.
• Emerging markets show structural strength and policy discipline as developed markets face debt strains.
• A more pragmatic, data-based tone dominated discussions, especially around U.S. policy and trade dynamics.

The outlook on the US economy started with recession fear in April, which morphed into stagflation concerns…but now the recovery is looking K-shaped. AI capex is having a large and likely durable impact on US growth, likely ranging between 0.1% and 0.5% (we have a separate comment on AI, which came up in all meetings, later). Ongoing fiscal expansion, easy financial conditions, combined with an AI capex cycle won the day (or quarters, more literally), over the consensus concern at the April IMF meetings that a downturn was nigh. The US labor market is a key focus, but still indeterminate to our eyes (because the reduction in labor supply due to migration policy might’ve been non-inflationary because of a cyclical decline in labor demand…the demand decline that was the consensus view in April). This set up led many or most participants to fall back on the argument “yet” for inflation rises and growth weakness, so “stagflation” still looms in the background. How could it not in rooms filled with bond investors in an era of high developed markets (DM) debt. However, there was an undeniable tint of growth for coming months or quarters. Making the April consensus on an economic downturn more acute was a near-universal rejection of Trump Administration economic policy…which decidedly waned at these October meetings.

Politics moving to the right (i.e., market friendly) was noted as presenting further upside risks. Particularly in Latin America, with elections upcoming in Chile, Brazil, Colombia, and Peru. (Key to us are also elections in much-smaller Bolivia, Guyana, Honduras, and Costa Rica.) Before you say “I know”, the paradigm is not Argentina, which is still cornered by its heterodoxy on the exchange rate (our opinion), and legacy clientelist political structures. Argentina is certainly capturing the “right wing” limelight, but it is much more complicated (more on Argentina later). Ecuador is a better representative of this phenomenon, El Salvador too. Essentially, all we’d like…and could easily get…are countries embarking on IMF programs that entail structural reform and fiscal discipline. This is well underway in Ecuador, with subsidy reform happening despite the obvious political obstacles, under an expanded IMF program. And it’s about to happen in El Salvador (the formal IMF part, as reform is already in-train), in our view. (To be clear, we are not saying Chile itself is going to have an IMF program, we’re only describing the type of economic orthodoxy that we and the market would welcome after political changes.) The politics underneath this phenomenon are undeniable, even in Brazil, and the “right” is often gifted with rising concerns over crime, which has been a political windfall. Looming over all of these is the Trump administration’s many agendas which directly touch basically every country in the region. The security agenda is the shiniest one right now, and US strategic considerations are obvious in the Ecuador IMF program, and many others. We got a reminder of these mid-meetings with announcements that CIA activities have been approved in Venezuela (more on Venezuela later).

Trump administration policies were analyzed less ideologically, more empirically. This had always bugged us at previous meetings – our profession is supposed to screen-in only empiricists, and I’m not supposed to be able to detect ideology ever. Yet, these meetings (which have a heavy European representation) consistently exhibited strong ideological preferences that were un-acknowledged. No more. Trump administration representatives were now normal features on panels. It was much more the way it used to be – just analyze policies and outcomes. Tariffs were lamented (as they should be, in purely economic terms, in our view), but the sky hadn’t fallen which was the bar this cohort set. We should riff that this makes us now more concerned about coming inflation, on the margin, because tariffs should be inflationary with lags (which may be “worth” the geopolitical and wealth-distribution objectives that are also behind tariffs, but these are not our day-jobs). This cohort is throwing in the towel on inflation concerns because they are trapped by their initial consensus “sky is falling” view, not because one can confidently extrapolate from the past two quarters of benign inflation, in our view. Sigh. Nonetheless, there was acknowledgement of a growing bi-partisan consensus on trade imbalances in the US. We also noticed that market participants had a decidedly “meh” attitude on the issue of Fed independence (which may be bad or good, but our point is the greater acceptance of empiricism).

Europe is set for a cyclical economic upturn based on German defense spending, but has missed its opportunity and everything else is negative. Germany ended its famous debt-brake, approved defense spending, etc. And that’s fully it. The rest is horrible. First, let’s go back to the April meetings. The talk was all about investors’ search for a reserve currency to benefit from declining relative interest in holding USD assets. This was Europe and the Euro’s chance. Remember the Draghi plan prior to April? Nothing since. We still have an ECB with tight interest rate policy on the one hand (leading to an overvalued EUR?), and very stimulative policy on its asset side (capping sovereign bond yields). And try talking to a European official about the gold price rise and whether a key recent driver was basically capital flight from Europe and you will get…a blank stare. Europe lags on AI (which was obviously a hot topic in every meeting), and digital currency policy seems to be a capital control structure to our eye. So, on two hot vectors Europe is nowhere or going backwards. The politics underneath are obviously fragile and should be well-known. But they aren’t much addressed; analysis and forecasting is potentially meaningless in such a context. A new depth of denial seems to surround Europe in the eyes of many meeting participants. This, when meeting participants’ email inboxes were filled with research reports updating intra-sovereign EZ spreads. And this author’s birthplace, France’s, sovereign rating was downgraded by S&P on the Friday close of meetings. Sigh.

China had a “glow-up”, to our eye – everyone is now copying state-industrial policy. For too long, we saw great under-appreciation of China’s policymaking at IMF meetings. And to be fair to that cynicism, other than for a few years there, China doesn’t have the kind of presence at IMF or in general that other countries do (because they don’t need the offshore financing), adding a (easily addressable) wrinkle to country analysis. And for a country said to have capital controls (remember, there are no serious controls on gold purchases in China, so this standby description of “controls” to describe China is extremely anomalous and should be diluted). Now to be fair to China, their officials presided over what is arguably the greatest economic success in history over the past 50 years. Further, the IMF presided over a massive balance of payments (their formal mandate despite creeping into fiscal support) imbalance over the past 30 years, so they aren’t perfect (though we love the IMF staff always). Anyway, the China-is-serious denial seemed to fade noticeably; it’s not our day-job but we noticed a lot of surprise at/recognition of their tech innovation across many sectors. A lot of this is again due to this cohort’s “sky is falling” view on China. As we noted in “The Curiously Unpopular Case for RMB Appreciation”, all the cool kids thought CNY would depreciate due to tariffs. It did the opposite. We remain intellectually frustrated that this CNY appreciation wasn’t central to every EM discussion (after all, EM trades more with China than with US, we aren’t asking for a lot), but we saw sparks of recognition. For example, Kenya’s swap of USD-denominated debt for CNY-denominated debt, India’s first use of CNY in oil purchases both occurred during the meetings. Not that you even needed those reminders after China, India, Saudi, UAE, Brazil and others steadily agreed to trade in each others’ currencies with virtually no media attention for years…but then, particular moments get noticed often for reasons of previous denial. Remember, correlation is the mother of superstition, and this is a superstitious group so we’ll go with the idea that these relatively minor headlines somehow reminded that something deep is going on. Nobody said it (other than us), but this is how money demand (demand for CNY in this case) expansion begins. I guess the best example of breaking denial is that nobody was criticizing China for “over-capacity” due to “state capitalism”. This is 100 percent because “state capitalism” is coming to a DM near you! “We” are copying Chinese industrial policy. Everything at the meetings was “strategic”, meaning we’re using national security as the rationale. And, it was all “good” to participants’ eyes. “Taking” stakes in strategic resources, directing production to favored sectors is, all-of-a-sudden, “good”. It reminds me of the GFC when, all-of-a-sudden, the central bank and treasury were supposed to co-operate, not be independent. How’d that work out? Anyway, China’s currency stability, the continued internationalization of RMB, acknowledged centrality to the global economy (rare earths were obviously another theme to the meetings) all conspired to give China a quiet “glow up”. Because they have a stable currency with a central bank that has anchored inflation is the real reason, but we’ll take any others.

Cockroaches in the DM credit cycle, Butterflies in EM. The financial media have covered some evidence of credit stress in the US. This was part of discussions which broke no new ground (balance sheets strong, but spreads at record tights, how boring can you get). Since the “news” was largely focused on corporate situations (i.e., not sovereign), our bias remains that the corporate bond market does not contain a lot of information right now. This is due to its illiquidity combined with all-time tight spreads, and decades of increased allocations to credit. So credit selling off from these conditions hardly seems interesting. Now, if USD interest rates are rising, yes you could absolutely get some problematic refinancings at unsustainable rates. But, the steepener has been the biggest consensus all year. And, fiscal outturns in the US have outperformed (part of the selloff in 30s was due to fiscal worries), tariff inflation hasn’t materialized (whether yet or ever), and we have a new Fed next year likely focused on getting nominal rates down across the curve according to almost every newspaper (sometimes they’re on to something). So, we don’t see a rising rate scenario in the next quarter or so (after that, it’s another story). On the last day of the meetings, however, your author’s birthplace, France’s, sovereign rating was downgraded by S&P. Sigh. Now that is something to be alert to. You saw our Europe view above. What we’d note about the whole setup is that swap spreads (which reflect bank liquidity more than credit risk per se) had been rising into all of this. If included, these spreads were sending signals prior to the headlines that got generated only when there were some specific credit spreads that gapped in supposed information-rich sectors like auto lending. This earlier rise in swap spreads reflects more profound risks at the sovereign level, in DMs mostly, as we and the IMF have been warning. Oh, we also had a brief mini-crash (mini so far) in US regional banks! It’s a good thing the IMF warned us all…again.

The gist of the IMF’s must-read GFSR (Global Financial Stability Report) was that the risks are in DM, at the sovereign level, and map to the financial system. It’s better when that sentence is re-read slowly, as it doesn’t get more basic than that. Have you re-read it? Other than war or alien invasion, this is it when it comes to economics and finance. We believe the IMF is spot-on and way too diplomatic (keep in mind, the IMF’s biggest shareholder is the US, followed by “Europe”). The only good news is that they gave a similar warning in their April GFSR which we analyzed in detail in our “Takeaways” then. Even newspaper readers get the storyline. The IMF notes the rise in UK Gilt yields, the Silicon Valley Bank episode, and how these map to derivatives markets like swap spreads (they say they map to the spread but we think it is more descriptive to say that they map to derivative markets themselves structurally, which we’ve discussed in detail over the decades). Anyway, re-read our last “Takeaways” as they get into all of that. This new GFSR explicitly warns that 0 percent haircuts on US Treasuries in repo financing have amplified leverage risks by encouraging huge (“large-scale”) basis trades (arbing bond futures and cash bonds). Hedge funds are creating large levered treasury positions due to the cheap funding in short-term repo markets. Any change in leverage would be a big deal, let’s agree. This is not a good context. But, this also reflects attempts by policymakers to influence the yield curve and we don’t know why in the post-GFC era we shouldn’t just assume that whatever tools are required will be deployed.

The gist of the IMF’s must read WEO (World Economic Outlook) was of “EM Exceptionalism” (our phrasing) and “resilience” (their phrasing), and worries over Europe. EMs are now structurally more robust than they were a decade ago, while DMs face policy fatigue and “persistent downside risks from protectionism and high debt levels”. Echoing the GFSR, they say that “fiscal vulnerabilities and market corrections could interact dangerously in DMs”. The growth forecasts are consistent with this – 1.5% for the DMs (or “Advanced Economies”), and low 4s for the EMs (“Developing Economies”). The report again highlights EM central bank independence that has anchored inflation (something we’ve written about for decades). It also underlined Europe’s questionable productivity prospects. Yawn. Total yawn. But the nice relaxing kind if you are in EM, where you earn carry when you sleep.

AI featured properly in meetings – the “hype” was focused where it should be, on the actual Capex, not on the productivity utopia that might obtain. I feel incredibly embarrassed writing about AI’s productivity impact, so never did. The idea that anyone should have strong opinions on the productivity implications of AI strikes me as ridiculous. All the horizons are out past 5 years, which should be a non-starter for any confidence. The profession can’t even calculate productivity well ex-post with all the “data”. So, it was great to see that meeting participants implicitly agreed. You were allowed to say you had no clue whether it would “work out”, how many jobs would be “destroyed”, and you were even able to argue that jobs would be created. The main point is that those discussions were taken with the appropriate grain of salt and were not the focus of attention. What was the focus of attention was the amount of AI capex which is adding between 0.1% and 0.5% to US growth in its cycle. FDI into the US increased by 100% in the first half of 2025…and US investment overseas declined by 14%. So, the US is seen as a clear leader and winner (maybe that’s not correct, but it’s the perception and capex lends support to this idea). (And, importantly, keep the USD hedging which actually occurred in 2025 separate from sales of US securities that were imputed (and after a time lag there’s now a bit more information on actual securities sales), but have not yet been proved during 2025; we don’t care about this mechanism in this case, because we are investing in the core FX and rates markets of EM, but it’s an important distinction for folks who like to make planetary/thematic conclusions about sales of “US assets”, which we do not like to do.) The depth and durability of the investment flow was also noticed, with sovereign support for AI development coming up in every single meeting – wherever this ends up, the runway seems long. It's “strategic”. That’s the right framing, in our view – there should be hype about the capex cycle, the rest is speculative.

A “moment” for EM – the presence of obvious DM problems was yet again juxtaposed against the absence of such problems in EM. Market participants are slowly accepting the framing that we’ve been suggesting – EM versus DM – as a way to understand global developments. The IMF joined us in that framing in the April meetings and are continuing now in the October meetings. The IMF should rightly be celebrating EM successes, because they are largely what we call EM “graduates”. They were on IMF programs or learned the lessons on their own, but the IMF was a big part of their success either directly through funding programs, or just intellectually. But, their biggest shareholders are the over-indebted DMs (funny that). So good on the amazing IMF staff for doing their job and being empiricists! There was much talk/hope/experience of inflows into EM. Can’t really hang your hat on those projections, but they were there. There were perhaps too many “frontier” experts for our “exuberance”-meters. Argentina and Venezuela saw overflow rooms. But, there was a sense that something that had been going on for a while (EM being better than DM) was cemented and perhaps looking at a new stage higher.

Sentiment was very bearish on USD and very bullish on everything EM – this tilts us USD bullish against the majors on the margin. We generally agree with the bullish EM local-currency conclusion, and have been positioned that way for years (mostly via Asia), and particularly this year (via higher-beta EMFX). But remember, the investor cohort was somewhat reluctantly dragged into this bullish EMFX view and got excited when newspapers started writing “Dollar Something-or-Other” stories. These are all fair stories for their time horizons, but old (we’ve been writing about them for over a decade) and still seem way overdone at the moment to us. A month or few of USD strength could be just what market positioning/psychology needs - a test – it’s a bit too much for us. We should emphasize, though, that everything we do is country-by-country, bond-by-bond, so we are speaking at a very high-altitude level here, consistent with the tenor of IMF meetings. In particular, EUR could falter here, that’s more what we’re thinking.

Observations on Key EMs

Mexico is among the success stories. It is a key beneficiary of the trade war (a combination of President Sheinbaum’s prudent approach and the USMCA “safety net”) and on-going fiscal consolidation, which allows the central bank to continue its gradual easing. Mexico’s local bonds are loving it! Mexico just moved to the top spot in the EM local debt league, supplanting Brazil.

South Africa’s progress on fiscal policy and SOE reform are being recognized more widely. The country did not generate too many headlines during the IMF week, but its monetary and exchange rate policies are beyond reproach, the country’s terms of trade are benefiting from gold’s dynamics, and the bi-partisan support in the U.S. for the AGOA framework is a boon for South Africa’s geopolitical backdrop. It also has greater exposure to China and it’s slowly strengthening currency.

Chile needs to use this time to build resilience, including external buffers. Trade fragmentation remains a major risk, but most of Chile’s exports are exempt from tariffs, which reduces direct risks. The budget might require some corrective action, but the medium-term fiscal outlook remains benign as both right-leaning presidential candidates are shown to have better chances in the second round, according to surveys. A problem is the need for external buffers can constrain upside to CLP. The counter to this is that local pension funds have very low exposure to their own local market.

Brazil is examining initial conditions going into an important election and the market is fairly relaxed. Brazil has amazing external accounts but looming fiscal problems due to a simply high level of government debt. Upcoming elections will ultimately determine the fiscal outcomes, but in the mean time a super-hawkish central bank is anchoring the market. And this market calm despite a boost to market-unfriendly President Lula’s popularity after a nationalist standoff with US President Trump.

Argentina’s economic team kept trying desperately to convince a skeptical market that it really did have the support of US Treasury. The actions of US Treasury (buying ARS, signing swap agreement, funding bond tender) continue to match the speech of Argentina’s economic team. The problem for the market is that it remains very overweight Argentine assets, and it is terrified that Milei will suffer another crushing defeat in the upcoming midterms and afterwards lose the support of US Treasury. Once the midterm elections are in the rearview mirror and the uncertainty is gone, US Treasury support should become an overwhelming support for Argentine bonds.

Venezuelan regime change never seemed this close. The Trump administration is taking direct military action to pressure the Maduro government and the Machado-led opposition is talking to investors about their detailed plans to govern once they are in power, including fully privatizing the oil sector and engaging with bondholders. It all has the feeling of being imminent and inevitable. But even if Maduro does not survive this time, a Venezuelan transition may not be so simple with other powerful Chavista figures who can make it difficult for an opposition government to fully control Venezuela’s sovereign assets. The difference with Argentina is that Venezuelan bonds are under-owned and potentially undervalued and so will continue to move higher on positive headlines.

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