Emerging economies face test from tighter funding as growth slows, says IMF

By Karin Strohecker and Rodrigo Campos

WASHINGTON (Reuters) -The International Monetary Fund on Tuesday cut its 2025 growth outlook for emerging economies including Mexico and China, warning that tighter funding conditions and a scarcity of development cash could inflict pain on developing nations.

Waves of tariffs announced by the administration of U.S. President Donald Trump and policy uncertainty are expected to stymie global growth just as the world economy emerged from major shocks such as the fallout from the COVID-19 pandemic and Russia's full-scale invasion of Ukraine.

In its World Economic Outlook, the IMF lowered its economic growth forecasts for emerging market and developing economies for this year and for 2026 to 3.7% and 3.9%, respectively, shaving off about half a percentage point on its previous estimates issued in January. 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 Fund said.

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

China's forecast was lowered by 0.6 percentage point, and by almost the same amount next year, after the world's second-largest economy has found itself in the White House 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 last year's estimated 4.1% GDP expansion. Russia's growth deceleration is a key driver for slower expansion in emerging Europe, which is predicted to stand at 2.1% this year and next.

Fiscal space for many emerging economies was much tighter than a decade ago, the Fund found, while at the same time 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 report said.

Although 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.

And 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 U.S. Agency for International Development while countries from France to Britain have also reduced their support.

(Reporting by Karin Strohecker and Rodrigo Campos; Editing by Andrea Ricci)