Countries like Mexico face the direct fallout, while broader ramifications include slower growth, weaker risk sentiment, and EM currency turmoil. Here, we’ll explore these dynamics and their implications for EM bond investors.
A quick recap
Credit markets have remained remarkably steady despite the rapid deterioration in risk sentiment in recent weeks. While EM credit has shown some weakness, spreads have widened by just one basis point so far in March, resulting in total returns of -0.56%.1 The EM corporate market’s reaction has been even more muted, with total returns of -0.22%, reflecting its resilience in a volatile geopolitical world.2
Local currency assets have held up, given expectations of a potentially weaker US dollar amid a quicker and deeper rate-cutting cycle. Year-to-date, the dollar spot index has weakened by 4.5%, with the Brazilian real, Mexican peso, and Polish zloty recording total returns of more than 3%.3 This should give EM central banks space to cut policy rates further.
The most significant impact has been on the spreads of oil and gas names. However, this has been driven more by persistent weakness in oil prices and OPEC’s intentions to relax production cuts soon. While the fallout has been limited, tighter US financial conditions could lead to wider, higher-yield spreads globally. We’re reassured by the strong starting EM balance sheets and the lack of major fiscal concerns across some of the larger EM countries.
Geopolitics still front and center
The two most significant geopolitical issues – conflicts in Ukraine and the Middle East – have diverging implications.
Ukraine
We believe that any ceasefire agreement, regardless of its robustness or longevity, will prompt Central and Eastern European (CEE) governments to increase their defense spending. This excludes Poland, where defense spending is already above 4% of GDP.4
Fiscal balances are expected to deteriorate, but this could be offset through two channels. First, a German economic recovery would support increased budget revenue collection, creating a positive spillover effect for CEE nations. Second, a resumption of Russian gas exports could drive down prices, providing relief to CEE trade balances and a minor tailwind for large EM companies.
Middle East
The ceasefires in Lebanon and Gaza remain fragile, with limited risk of significant fallout beyond the immediate area. Market spreads in Jordan have widened considerably due to the potential withdrawal of USAID funding, which accounts for around 3% of Jordan’s GDP.5 A prolonged Gaza ceasefire would benefit Egypt, as it would increase trade through the Suez Canal and boost revenues.
Tariffs and trade war
The US approach to tariffs remains highly uncertain, especially the path of future negotiations. Mexico and India are the most exposed, with the US being a sizable export market in terms of GDP percentage.
Mexico is in the eye of the tariff storm. Many fear a trade war could cause lasting damage to the economy. However, the outlook is more favorable than the headlines suggest. We believe there will be a near-term resolution, allowing Mexico to build leverage ahead of a United States-Mexico-Canada Agreement (USMCA) renegotiation this year or next. Mexico’s relative advantage is increasing, driven by ongoing nearshoring.6
The market seems to agree. The most recent repricing of Mexican corporates occurred after the election, with recent moves more muted. Indeed, Mexican credit-default swaps are only a few basis points wider.
Tempest in a tetera?
We believe President Trump is using tariffs as a bargaining chip ahead of early USMCA renegotiations. If tariffs persist longer than forecast, we believe the impact on Mexico’s economy should be manageable. In the meantime, local and foreign investment will remain in a wait-and-see mode until there is certainty regarding tariffs and the USMCA.
Tariffs and USMCA, a potted history
In June 2018, the US announced a 25% tariff on Mexican steel and a 10% on aluminum.7 In response, the Mexican government briefly imposed retaliatory tariffs on a small number of US goods, including motorboats, fresh cheese, bourbon whiskey, and cranberries. These targeted key republican strongholds to exert pressure on Trump.
In 2019, Trump escalated the situation by threatening 25% headline tariffs on all Mexican goods.8 Despite these threats, Mexico managed to avoid tariffs.
Why?
Trump was building leverage ahead of the USMCA negotiations. We believe the current situation mirrors these tactics.
While the USMCA is due for renewal in July 2026, we expect it will be renegotiated (rather than renewed) in the second half of 2025. Likely outcomes to appease Trump include:
- Mexico implementing additional tariffs on China
- Stronger rule-of-origin tracking, diminishing Chinese influence in the value chain for manufactured goods
- Strengthening resolution/arbitration mechanisms to support high market share
Economic impact
We expect US-Mexican relations to strengthen over the medium term, with the nearshoring theme gaining momentum. As evidence, we highlight the post-2016 step change in export growth, which climbed from 6% to 8–10%.9
Most expect Mexican President Claudia Sheinbaum to remain diplomatic and cooperative on issues related to narcotics and migration. As a result, we believe the likelihood of the US imposing tariffs for twelve months to be low. This would result in …
- Currency devaluation of 8–10% in support of the export sector10
- A 5% reduction in 2025 GDP, which correlates with the low-end of 2025 guidance: 0.7–1.3%11
- A 0.6–1.2% impact on the headline inflation rate (retaliatory tariffs outlined above would take them to the wide end of this range), which correlates with the wider end of 4–5% inflation expectations11
- Cost of risk from 1.8% to 2.0%11
What might this mean for corporates?
In 2024, Banorte, one of Mexico’s largest local banks, experienced a 24% year-over-year increase in its corporate loan books as firms drew down on working capital lines, increased capacity, and witnessed broad-based growth in retail and industrial sectors.12
In 2025, the bank expects the growth rate to moderate to 9-10% as investment decisions remain largely on hold.13
Banorte compiles an internal leading indicator based on foreign direct investment (FDI) announcements and investment intentions. The latest report notes that FDI has decreased, which aligns with the weaker business sentiment suggested by the monthly Purchasing Managers' Index data. High-frequency data suggests exports picked up in January, with US companies building inventories ahead of potential tariff announcements.
Final thoughts
Mexico is right in the middle of the tariff tensions. However, we believe that any direct impact remains limited, becoming increasingly muted the further we move away from the action. And what about the rest of the EM corporates? It might sound like a sweeping generalization, but we believe most EM companies are relatively insulated from the brouhaha surrounding global geopolitics. Indeed, any setbacks are usually related to market sentiment rather than company fundamentals. That is why we believe focusing on the latter while remaining mindful of the former to be the best long-term investment strategy.
1 JP Morgan EMBI (Emerging Market Bond Index) Global Index, March 2025.
2 ICE BofA Emerging Markets Corporate Plus Index, March 2025.
3 "Why the Dollar Is Having Its Worst Year Since 2008, and What It Means For You." Investopedia, March 2025. https://www.investopedia.com/us-dollar-having-worst-year-since-2008-how-it-affects-consumers-usd-11693167.
4 "Poland leads NATO on defence spend - but can it afford it?" Reuters, October 2024. https://www.reuters.com/world/europe/poland-leads-nato-defence-spend-can-it-afford-it-2024-10-23/.
5 "Which Countries Are Most Exposed to US Aid Cuts; And What Other Providers Can Do." Center for Global Development, February 2025. https://www.cgdev.org/blog/which-countries-are-most-exposed-us-aid-cuts-and-what-other-providers-can-do.
6 Nearshoring refers to the practice of companies moving their production sites closer to the US to reduce costs and improve efficiency.
7 "U.S. Tariffs on Steel and Aluminum Imports." Mayer Brown, March 2018. https://www.mayerbrown.com/en/insights/publications/2018/03/us-tariffs-on-steel-and-aluminum-imports.
8 "President Trump Announces Tariffs on All Imported Goods from Mexico." Husch Blackwell, May 2019. https://www.internationaltradeinsights.com/2019/05/president-trump-announces-tariffs-on-all-imported-goods-from-mexico/.
9 "Mexico’s Positive Impact on the U.S. Trade Balance." China Financial Markets. Carnegie Endowment, April 2017. https://carnegieendowment.org/china-financial-markets/2017/04/mexicos-positive-impact-on-the-us-trade-balance?lang=en.
10 "Economic Impact Analysis of US Tariffs on Mexico and Mitigating Factors." Wilson Center, February 2025. https://www.wilsoncenter.org/article/economic-impact-analysis-us-tariffs-mexico-and-mitigating-factors.
11 "The Fiscal, Economic, and Distributional Effects of 20% Tariffs on China and 25% Tariffs on Canada and Mexico." The Budget Lab. Yale University, March 2025. https://budgetlab.yale.edu/research/fiscal-economic-and-distributional-effects-20-tariffs-china-and-25-tariffs-canada-and-mexico.
12 "Q2 2024 Earnings Call." Quarterly Results. Banaorte, July 2024. https://investors.banorte.com/~/media/Files/B/Banorte-IR/financial-information/quarterly-results/es/2024/2T/Conference%20Call%20Transcript.pdf.
13 "Grupo Financiero Banorte Boosts Growth With Solidity and Credit Quality." Grupo Financiero Banorte, January 2025. https://www.banorte.com/wps/portal/gfb/Home/noticias-banorte/noticias-banorte-2025/banorte-impulsa-su-crecimiento.
Important information
Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
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