Emerging Asia ready for take-off

AS the global economy adjusts to a more fragmented and uncertain landscape, emerging markets (EMs) are increasingly seen as a key engine of future growth rather than merely a source of higher risk.

Their ability to sustain investment, strengthen domestic capital markets and lift productivity is expected to determine whether they can capitalise on the next phase of global economic expansion.

That opportunity is especially pronounced in Asia, where favourable demographics, technology-driven industries and expanding financing ecosystems are reshaping the region’s long-term investment appeal.

Those themes dominate discussions at S&P Global Ratings’ conference, Asia Emerging Markets: Structural Shifts, held in Singapore last month.

The credit rating agency says EMs are poised to account for about 65% of global growth through 2035, with Asia expected to remain at the centre of that expansion.

“This decade is decisive for EMs. While they face challenges, these countries are well positioned to thrive,” says Jose Perez-Gorozpe, global head of national ratings and analytical solutions at S&P Global Ratings.

The agency believes the fastest growth rates are likely to come from Vietnam, India and Indonesia, while China alone could contribute more to global growth than advanced economies by 2030.

Still, stronger economic growth alone will not be enough to narrow the income gap with developed nations.

Conference panellists argue that sustained productivity gains, effective use of demographic advantages and broader access to long-term financing will ultimately determine how far emerging economies can advance.

“The defining challenge for EMs is not macro volatility. It is access to reliable, diversified and cost-effective financing options,” says Guy Deslondes, global head of EM development at S&P Global Ratings.

“The scale of investments required – for infrastructure, energy transition, sustainable development, technology – is simply unprecedented. Public balance sheets alone will not be sufficient, in context of scarce public funding,” he adds.

Deslondes notes that Asia typically attracts around half of EM portfolio flows, although much of that capital remains concentrated in only a handful of markets. To sustain broader regional development, domestic financial systems must continue evolving.

“Capital markets will need to do more, go deeper, and reach further. Ultimately, strong domestic capital markets are not just a funding tool, they are a pillar of economic sovereignty,” he says.

Remarkably resilient

While geopolitical tensions continue to dominate investor sentiment, conference participants generally view Asia’s emerging economies as remarkably resilient.

Panellists point to the region’s ability to weather oil supply disruptions, shifting supply chains, tariff increases and geopolitical conflicts without suffering the severe economic damage many had anticipated.

One major surprise is the relatively modest impact of recent disruptions in global oil markets.

“This is the largest supply disruption that has ever happened in the oil supply chain. If anyone asked earlier this year (before the war) what could be the oil price if oil flow through the Strait of Hormuz stops, I think the (prediction) could easily be much higher...US$150, US$160 a barrel or more,” says Premasish Das, executive director and head of Asia, Middle East, Africa and Eurasia Oil & Fuels Research at S&P Global Energy.

Instead, oil prices remain below many earlier projections. Das attributes that outcome to three factors: weaker Chinese oil import demand, sharply higher US exports and the release of strategic petroleum reserves alongside healthy commercial inventories.

Technology exports provide another important buffer for the region.

Louis Kuijs, chief economist for Asia Pacific at S&P Global Ratings, says the rapid expansion of artificial intelligence (AI)-related technology exports continues to support several Asian emerging economies, particularly Malaysia, Thailand and Vietnam.

“The boom in AI-related tech exports is positively affecting many of the economies in the region. And that will continue to be the case, in our view,” says Kuijs.

“I know there is quite a bit of anxiety now in financial markets about the sustainability of the AI story. But if you look at the economic data – say, export of semiconductors and these kinds of things – they are continuing to move ahead so far. It may change, but it has not yet changed,” he adds.

Kuijs also argues that despite persistent concerns over supply chain disruptions, manufacturing activity across much of Asia continues to demonstrate resilience.

“We keep on telling each other about all the supply side risk,” says Kuijs.

“But broadly speaking, it’s remarkable the resilience that we have seen in terms of manufacturing sentiment and supply chains.”

Even so, external risks remain difficult for policymakers to control.

Kim Eng Tan, managing director and sector lead for sovereign ratings in Asia Pacific at S&P Global Ratings, says geopolitical conflicts and higher tariffs leave governments with limited policy choices.

“The war with Iran and the increase in US tariffs are events that governments can only respond to – and one risk is that the response will be higher deficit spending,” says Tan.

“A government’s most important mission is to ensure social stability. So, when prices are going up, policymakers will do whatever they can to get supply and keep the price stable,” he adds.

He warns repeated fiscal support measures could eventually weaken sovereign credit quality.

“The easiest way to solve the problem of social stability is to spend more money or collect less tax which will negatively affect budget positions. If that habit becomes persistent, ratings will weaken.”

Financing requirements

Alongside these structural shifts, financing requirements are becoming substantially larger.

“The region is entering a critical investment cycle,” says Ritesh Maheshwari, managing director, head of South-East Asia and head of Asia-Pacific market outreach at S&P Global Ratings.

“The scale of capital required is enormous and the funding landscape is becoming increasingly complex,” he notes.

With interest rates remaining structurally higher than a decade ago and fiscal capacity varying widely across countries, conference panellists believe private capital markets will play an increasingly important role.

Julie Ng, chief executive officer of RAM Ratings, says Malaysia alone will require around RM1.2 trillion of long-term funding over the next two decades to support infrastructure, energy transition and digital infrastructure projects, many of them linked to AI and data centres.

Across the region, panellists also see growing interest in offshore bond issuance, project finance, securitisation, municipal bonds and cross-border investment channels as governments and companies search for more diversified sources of long-term capital.

Jackie Surtani, regional director at Asian Development Bank, says no single funding source will be sufficient.

“Domestic capital markets are necessary but not sufficient; cross-border funding channels and institutional investors will still be required for many large infrastructure and transition projects. The region needs more bankable projects and risk-sharing mechanisms that can attract that capital.”