Public Fixed Income

The EM Default Picture: More Nuanced Than Headlines Imply

June 2020 – 7 min read
The coronavirus pandemic is creating short-term and long-term challenges for emerging markets (EMs). But not all sovereign and corporate issuers can be painted with the same broad brush, and placing too much weight on overly dire forecasts may result in missed opportunities.

In some ways, the challenges confronting EMs in the short to medium term are similar to those faced by their developed market (DM) counterparts. Health and wellness are front and center in this regard, as COVID-19 shows no preference for the population of Germany over that of Algeria. And no matter how you slice it, both EMs and DMs are facing financial distress in the vast majority of sectors. With locked-down businesses and stay-at-home orders still largely in effect, virtually every economy globally is feeling the pain. 

But EMs are also grappling with a unique set of obstacles. For one, many rely heavily on tourism—as opposed to it being an ancillary industry in most developed market economies—for which revenue streams have all but dried up. Many also rely on remittances from their migrant populations living in foreign countries, which may be threatened by rising unemployment. Some countries also depend greatly on oil—and the decline in prices has created a tough reality for a number of EM exporters in particular. EMs are further disadvantaged by the fact that they do not have reserve currency status (i.e. their currencies, unlike the USD or EUR, are not held in significant quantities by central banks or other monetary authorities as part of foreign exchange reserves), and therefore are on the other side of ‘flight to safety’ trades. And finally, the financial firepower of EM central banks is quite limited relative to their DM counterparts, meaning they have less capacity to conduct ‘shock and awe’ monetary stimulus programs. 

However, contrary to what some headlines may suggest, these challenges do not necessarily translate into an inevitable and widespread spike in defaults. EM economies are slowing as a result of the crisis, certainly, and we will unquestionably see defaults increase as a result. But not all countries and companies will be impacted to the same extent—and understanding the complex factors driving the default picture will be key to identifying the issuers that are best-positioned to withstand the current shock.

Want to read the full article?

View PDF

Omotunde Lawal, CFA

Head of Emerging Markets Corporate Debt

Cem Karacadag

Head of Emerging Markets Sovereign Debt

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

Related Viewpoints