Key takeaways:
- Emerging market debt hard currency (EMD HC) remains a highly diversified asset class, with more than 70 countries in the investment universe. Opportunities, risks and development trajectories vary across countries.
- Investment outcomes in EMD are to a large extent driven by idiosyncratic risks. In today’s volatile and fast-changing global environment, active management is essential to separate winners from losers.
- One of the key features is formulating country views through in-depth fundamental research, which is often on the ground. Here we explore six countries, our view on their outlook and explain our rationale.1
View of Ulaanbaatar city, Mongolia.
The 3 “Good”: Mongolia, Bosnia and Herzegovina and Argentina
Mongolia
Mongolia offers attractive value relative to fundamentals. The sovereign trades broadly like a BB-rated credit, cheaper than JHI’s internal estimates. The opportunity set also extends beyond the sovereign, with exposure available through state-owned banks, a sovereign-guaranteed municipal bond and selected corporate issuers that offer meaningful spread pick-up.
Ratings momentum: Mongolia remains one of the stronger EM sovereign upgrade stories. The credit has benefited from robust growth, declining debt ratios, improving external metrics, rising foreign exchange (FX) reserves and continued policy reform. The direction of travel remains positive in our framework, with further rating upgrades likely over the next 18–24 months. Successful renegotiations of the Oyu Tolgoi (OT) copper mine project (currently ongoing) could front-load cash flow and increase Mongolia’s benefits from the project, thus boosting the case for further rating upgrades.
Macro backdrop: High copper production, resilient commodity exports, record FX reserves and prudent fiscal management have materially strengthened the sovereign balance sheet, combined with strong growth, low fiscal deficits and improving external accounts. Infrastructure investments in rail and energy could continue to support growth and advance the government’s export-diversification agenda.
Reform agenda: The reform direction remains credit-positive, with authorities focused on improving SOE (state-owned enterprise) governance, strengthening the investment climate and developing domestic capital markets.
Key risk: Mongolia has seen three prime ministers in nine months, while a fractured ruling party and the risk of an opposition boycott could constrain the government’s ability to pass legislation, including fiscal and reform measures. The upcoming election cycle (presidential elections next summer and parliamentary ones in 2028) could intensify demands for higher wages, subsidies and other social spending, threatening the country’s fiscal position.
Bosnia and Herzegovina
Bosnia remains one of the cleaner frontier / Emerging Europe credit stories from a balance-sheet perspective. The sovereign framework is constrained by politics, weak demographics and low growth. Yet debt remains exceptionally low, external financing is largely concessional, and potential EU accession continues to provide a medium-term credit anchor. The key debate is increasingly political rather than economic.
Unique setup: Bosnia and Herzegovina is best understood as a sovereign with relatively sound macroeconomic fundamentals constrained by an exceptionally complex political and institutional framework. The country has the power divided on the state level between the Federation of Bosnia and Herzegovina (FBiH), Republika Srpska (RS), and the Brčko District. This structure preserves stability but often creates policy paralysis, delays reforms, and complicates economic management. While interlinked, the two main entities (RS and FBiH) issue debt on a standalone basis due to their enshrined budgetary autonomy.
Low debt and strong balance sheet: The two entities stand out in the frontier universe for their exceptionally low debt burden, and financing largely sourced from concessional multilateral lenders. The country benefits from sizeable remittances, Foreign Direct Investment inflows, ample FX reserves and continued International Financial Institutional support. External financing is diversified and stable, while the currency board framework and reserve coverage help underpin macroeconomic stability
Supportive, but distant EU anchor: The EU accession process remains a positive long-term framework for reforms and external funding, but progress is likely to be slow and uneven. Political fragmentation, governance challenges and reform bottlenecks are still hurdles.
Key risk: Election-driven fiscal slippage is the key risk. Spending growth is being driven by pensions, transfers, wages and infrastructure outlays ahead of elections. Geopolitical uncertainty around the potential secession of Republika Srpska has subsided recently, but it remains a background risk to be monitored.
Argentina
Financing risk has been largely neutralised. Argentina has secured substantial multilateral and official financing and built a credible funding runway. The government has repeatedly indicated it does not need to access international markets in the near term and can wait for more attractive funding conditions. Sustained primary surpluses, spending discipline and a commitment to macroeconomic stabilisation have fundamentally improved debt sustainability and reduced default risk.
Ratings momentum: Argentina has exited the CCC “penalty box”. Fitch, S&P and Moody’s all upgraded the sovereign to B-/Stable and Moody’s with positive outlook in 2026, reflecting improved fiscal metrics, stronger liquidity and growing confidence in policy continuity. This broadens the potential investor base and could support further spread compression.
Reasonable political stability: President Milei remains politically strong, reducing policy reversal risk. Following the mid-term elections, rating agencies highlighted his stronger mandate and greater congressional support for advancing reforms, while the opposition has so far struggled to present a compelling alternative. The market increasingly views reform continuity as the base case.
Structural reforms and the export boom are improving the external story. Deregulation, RIGI,2 mining reforms and the expansion of Vaca Muerta (oil field bordering Chile) are attracting investments, boosting exports and supporting reserve accumulation over time. Argentina is also one of the few countries who could benefit from an unusually strong El Nino in 2026-27.
Key risk: Reserve accumulation remains the key vulnerability. Despite major progress, Argentina still needs to continue rebuilding reserves and strengthening external liquidity. A loss of reform momentum or external shock could slow the ratings migration story. Political risks are key to watch as these have previously derailed positive momentum.
The 3 ‘Bad’: China, Kenya and Bahrain
China
China’s US Dollar (USD) sovereign bonds offer one of the least attractive risk-reward profiles in the EMD HC universe. Valuations are exceptionally rich, with several Chinese sovereign USD bonds having traded at negative spreads to US Treasuries, meaning investors have accepted lower yields than on comparable US government bonds. More recently, China has issued USD bonds at yields broadly in line with Treasuries.
Treasury level yields: It is difficult to justify accepting Treasury-level yields while taking exposure to Chinese policy, governance, geopolitical and fundamental risk. The upside from further spread compression appears extremely limited, while downside risks remain meaningful. China also behaves differently from most EM sovereigns. It offers little exposure to the traditional EM alpha drivers of reform, rating upgrades, macro stabilisation or geopolitical normalisation. As a result, it resembles a low-spread developed-market credit rather than a typical EM sovereign opportunity.
Valuation challenge: The same valuation challenge extends to quasi-sovereigns, where investors receive limited additional spread despite greater governance and event risk.Given the abundance of more attractively valued opportunities elsewhere in the asset class, we continue to see no compelling reason to own Chinese hard currency sovereign or quasi-sovereign debt today.
Kenya
Kenya presents an unattractive risk/reward profile and we view the credit primarily through a near-term funding and market-access lens rather than a fundamental ratings lens. Sovereign spreads remain highly sensitive to external financing conditions, International Monetary Fund (IMF) engagement and investor confidence, making liquidity the dominant risk factor.
Fiscal execution: Kenya has repeatedly fallen short of fiscal consolidation targets, with a long history of ambitious adjustment plans being diluted or delayed during implementation. The most recent fiscal deficit is estimated to print at 6.4% of GDP – 1.7% of GDP higher than initial target – underlining the weak track record of delivering sustained improvements in debt dynamics.3 Deadly protests in May 2026 and August 2027 election point to tight social and political constraints, limiting scope for meaningful fiscal improvement. Rising off-balance-sheet financing raises concerns around fiscal transparency and governance, while also creating additional contingent liabilities for the state.
IMF engagement: Kenya has often used IMF progress and programme discussions to restore market confidence and facilitate Eurobond issuance, but reform momentum has weakened once financing pressures eased. This has eroded confidence that announced fiscal measures will translate into durable credit improvement. A successful IMF programme conclusion (something we do not currently expect) remains the main tail risk.
Valuation: The market increasingly prices Kenya as a refinancing success story following the easing of near-term funding concerns. Unresolved fiscal weaknesses, dependence on continued market access and uncertain reform implementation could re-emerge if financing conditions become less supportive, and current valuations do not fully compensate for these risks.
Key risk: Sustained rise in oil prices (two thirds of its oil imports originate from the Gulf region)4 continue to be a significant risk. Kenya has become more resilient, but higher oil prices would burden the overall financial situation.
Bahrain
Bahrain still has a structural negative outlook. Recent developments reinforce the thesis of Bahrain being an unattractive investment opportunity despite the material widening in spreads. The credit story is dominated by weak fiscal and external fundamentals, very limited policy buffers and dependence on timely Gulf Cooperation Council (GCC) support.
Macro backdrop: Bahrain’s public debt has climbed to an estimated 152% of GDP, while FX reserves stand at less than US$4bn, equivalent to roughly 6% of GDP and roughly three months of imports.5 This leaves Bahrain with the weakest balance sheet among Gulf sovereigns. Damage to energy infrastructure and disruptions to Strait of Hormuz traffic have sharply reduced oil output and government revenues, while tourism and domestic activity have also weakened, further stretching the fiscal position.
Policy buffers: Bahrain’s buffers are modest relative to upcoming financing needs and are not complemented by a meaningful sovereign wealth cushion. The dinar’s dollar peg further limits policy flexibility and adds pressure on reserves during periods of external stress.
Conflict impact: Refinery operations have been disrupted and reportedly struck by drones; aluminum faces rising supply-chain risks; and both trade and tourism have stalled.
GCC support: The key investment question is not whether Bahrain needs additional Gulf support, but when it arrives and under what conditions. The UAE’s US$5.4bn swap line and continued market access have bought time, but external debt repayments of more than US$5bn through end-2027 exceed current reserves.6
Valuation and key risk: External support is likely, given the regional contagion risks of a potential default or pressure on the dollar peg, as well as the relatively limited fiscal cost for wealthier GCC members. The timing of support could be later than market expectations and delayed until a crunch point arrives and Bahrain consequently loses market access, similar to the 2018 bailout episode.
Footnotes
1 The above are the Portfolio desk’s views and should not be construed as advice and may not reflect other opinions in the organisation. The views are subject to change without notice.
2 Régimen de Incentivo para Grandes Inversiones (Large Investment Incentive Regime), a flagship investment framework introduced under the Milei administration to attract large-scale domestic and foreign investment.
3 Source: Citi, 7 July 2026.
4 Source: Goldman Sachs, 1 July 2026.
5 Source: BofA, as at end of June 2026.
6 Source: Haver, Bloomberg, Ministry of Finance and National Economy, Central Bank of Bahrain (CBB), bond prospectuses, BofA Global Research, 3 August 2026.
Sovereign debt securities are subject to the additional risk that, under some political, diplomatic, social or economic circumstances, some developing countries that issue lower quality debt securities may be unable or unwilling to make principal or interest payments as they come due.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Emerging market investments have historically been subject to significant gains and/or losses. As such, returns may be subject to volatility.
Active investing: An investment management approach where a fund manager actively aims to outperform or beat a specific index or benchmark through research, analysis, and the investment choices they make. The opposite of passive investing.
Balance sheet: A financial statement that summarises a company’s assets, liabilities, and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
Cash flow: The net balance of cash that moves in and out of a company. Positive cash flow shows more money is moving in than out, while negative cash flow means more money is moving out than into the company.
Credit anchor: This typically refers to a primary, financially stable entity (such as a large corporation or buyer) whose strong credit profile serves as the foundational backing for extending credit or financing to smaller, connected entities in a supply chain.
Concessional financing: Financing provided on more favourable terms than market loans, such as lower interest rates, longer repayment periods or grace periods.
Contingent liabilities: Potential financial obligations that may arise in the future depending on the outcome of a specific event or circumstance.
Corporate: Privately controlled companies or issuers that do not qualify as sovereign, quasi-sovereign, majority sovereign, or sub-sovereign entities. Corporate issuers are evaluated primarily on their standalone credit fundamentals rather than government support.
Credit rating: An independent assessment of a borrower’s ability to repay its debt. Ratings typically range from higher quality borrowers with lower perceived risk to lower-rated borrowers with higher perceived risk.
Currency board: This is a monetary system where a country’s currency is fixed at a set exchange rate to another currency and the central bank holds sufficient foreign exchange reserves to back that commitment.
Currency peg: A system in which a country’s currency is fixed at a specified exchange rate against another currency.
Debt sustainability: The ability of a government to meet its debt obligations over the long term without needing exceptional financial support or risking default.
Default risk:The risk that a borrower will be unable or unwilling to make interest payments or repay the principal amount of a loan or bond when due.
Emerging markets: The economy of a developing country that is transitioning to become more integrated within the global economy. This can include making progress in areas such as depth and access to bond and equity markets and development of modern financial and regulatory institutions. Emerging market debt are bonds issued by governments or companies in emerging market countries.
Economic fundamentals: The underlying factors that influence the strength and stability of an economy, such as growth, inflation, debt levels and government finances.
External metrics: In economics, a measure a country’s or firm’s performance relative to its external environment or foreign transactions. external accounts (also known as international accounts) track all economic transactions and financial positions between a country’s residents and the rest of the world.
Eurobond: A bond issued in a currency that differs from the currency of the country where it is issued. Despite the name, a Eurobond does not have to be issued in euros.
External financing: Funding provided from outside a country, often by international investors, banks or multilateral institutions.
External liquidity: A country’s ability to meet its international payment obligations using foreign-currency assets and funding sources.
Fiscal consolidation: Measures taken by a government to reduce budget deficits and improve the sustainability of public finances, usually through spending cuts, revenue increases, or a combination of both.
Fiscal deficit: The amount by which a government’s spending exceeds its income over a given period.
Fiscal position: A measure of a government’s overall financial health, taking into account its revenue, spending, debt levels and budget balance.
Fiscal slippage: A deterioration in government finances, typically when spending is higher or revenue lower than planned.
Foreign direct investment (FDI): Investment made by a company or individual in one country into business operations or assets located in another country.
Foreign exchange (FX) reserves: Assets held by a country’s central bank, usually in major foreign currencies, that can be used to support the currency and meet international payment obligations.
Gross domestic product (GDP): The value of all finished goods and services produced by a country within a specific time period (usually quarterly or annually). When GDP is increasing, people are spending more and businesses may be expanding. GDP is a broad measure of the size and health of a country’s economy and can be used to compare different economies.
Hard currency debt: A bond issued by an emerging market government or company where interest and principal are paid in a major international currency, such as US dollars.
Idiosyncratic risk: Factors that are specific to a particular company and have little or no correlation with market risk.
Inflation: The rate at which the prices of goods and services are rising in an economy. The consumer price index (CPI) and retail price index (RPI) are two common measures; the opposite of deflation.
International Monetary Fund (IMF): An international organisation that works to promote global economic stability and provides financial support and policy advice to member countries.
Liquidity: Liquidity is a measure of how easily an asset can be bought or sold in the market. Assets that can be easily traded in the market in high volumes (without causing a major price move) are referred to as ‘liquid’.
Macroeconomic: Relating to the economy as a whole, including factors such as economic growth, inflation, employment and government finances.
Majority-state-owned corporate: Entities where the government owns or controls 50% or more of the equity or voting rights, but which are not necessarily 100% owned or guaranteed. Examples include many national oil companies, utilities, and banks.
Market access: The ability of a government or company to borrow money from investors in capital markets.
Multilateral financing: Funding provided by international institutions, such as the International Monetary Fund (IMF) or World Bank, to support economic programmes or development projects.
Policy buffers: Financial resources or policy tools that governments can use to help manage economic shocks or periods of stress.
Primary surplus: A situation where a government’s revenues exceed its expenditures, excluding interest payments on existing debt.
Quasi-sovereign: Entities that are 100% owned by or 100% guaranteed by the national government.
Ratings upgrade: An improvement in a borrower’s credit rating by a rating agency, reflecting a stronger perceived ability to meet its debt obligations.
Reform agenda: A programme of policy changes designed to improve a country’s economic performance, public finances or investment environment.
Refinancing: The process of replacing existing debt with new borrowing, often to extend repayment terms or secure more favourable financing conditions.
Remittances: Money sent by people working abroad to family or households in their home country.
Reserve accumulation: An increase in a country’s foreign-exchange reserves over time.
Sovereign: Debt issued directly by a national government or sovereign state.
Sovereign wealth fund: A state-owned investment fund that invests national savings or surplus revenues on behalf of a government.
Spread (credit spread): The difference in yield between securities with similar maturity but different credit quality, often used to describe the difference in yield between corporate bonds and government bonds. Widening spreads generally indicate a deteriorating creditworthiness of corporate borrowers, while narrowing indicates improving.
Spread compression: A narrowing of credit spreads, usually indicating that investors perceive less risk and are willing to accept a lower additional yield.
State-owned enterprise (SOE): A business entity created, wholly owned, or significantly controlled by a national or local government to engage in commercial activities.
Swap line: A central bank swap line is an economic arrangement that allows two countries to exchange their local currencies directly. This mechanism ensures that financial institutions have reliable access to foreign currency liquidity without relying on open foreign exchange markets.
Sub-sovereign: Government entities below the national level, such as states, provinces, municipalities, regions and local authorities.
Yield:The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, in its simplest form, this is calculated as the coupon payment divided by the current bond price.
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All opinions and estimates in this information are subject to change without notice and are the views of the author at the time of publication. Janus Henderson is not under any obligation to update this information to the extent that it is or becomes out of date or incorrect. The information herein shall not in any way constitute advice or an invitation to invest. It is solely for information purposes and subject to change without notice. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Whilst Janus Henderson believe that the information is correct at the date of publication, no warranty or representation is given to this effect and no responsibility can be accepted by Janus Henderson to any end users for any action taken on the basis of this information.