COVID-19 dealt a huge blow to the world economy, resulting in an unprecedented 3-percent contraction inglobal output. The emerging markets (EMs) were affected particularly strongly. The impact would have beeneven larger had it not been for decisive and unprecedented policy actions. These actions came with a price,though – their virtually unavoidable side effect was accumulation of vulnerabilities in many countries andsectors. This article documents recent developments in EMs, assesses their prospects and challenges, anddiscusses appropriate policy settings for the period ahead. Toward the end, it zeros in on one particularchallenge – the risk of a tightening in global financial conditions and appreciation of the US dollar that could betriggered by a general increase in risk aversion or sudden reassessment of the likely path of the US monetarypolicy.