Busting myths of EM debt

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Emerging market debt issuers are often assumed to be inherently less creditworthy than their developed market counterparts, but in our experience the reality tells a different story.

For one thing, in recent years emerging market (EM) default rates have not been materially greater than those in developed market, (DM) and the formers’s bond covenant quality has also tended to be higher on average.

Within the high yield (HY) area of EM debt, fundamentals are also improving and default rates are expected to decline this year.

Comparing default rates for EM corporate HY issuers with those of their US equivalents since 2000, two observations are worth highlighting. First is the close similarity in trend between the two series which suggests global cyclical factors, rather than regional idiosyncrasies, explain a large part of the default experience for both EM and US corporate issuers. Second, the magnitude of default rate has been broadly similar across cycles, with 2002 the only meaningful exception in the period surveyed.

Similarly, when we consider EM Sovereign defaults we can see how credit events have become more of a rarity. Using JPMorgan’s Emerging Market Bond Index (EMBI) Global benchmark to represent the investable hard currency EM sovereign issuers accessible to international investors, only seven EM sovereigns in the index have defaulted since 2000. The adoption of flexible exchange rates, strengthened external balances, reserve accumulation and a move from external to local currency debt issuance go some way toward explaining this shift.

Rodica Glavan – Insight Investment, a BNY Mellon company

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