GEMs Consortium Releases New Reports on Credit Risk in Emerging Markets and Developing Economies

The second publication breaks new ground by offering 40 years of data on default rates and, for the first time, recovery rates for sovereign and sovereign-guaranteed loans.

Two newly released reports by the GEMs Consortium, a coalition of 26 multilateral development banks (MDBs) and development finance institutions (DFIs), provide detailed insights into the credit risk profiles of emerging markets and developing economies (EMDEs). These reports, based on decades of lending data, offer valuable information to guide investors, challenging the traditional view that investments in these regions carry disproportionately high risks.

The first report examines the credit performance of private and public sector lending in EMDEs. It reveals that the average annual default rate for private entities is 3.56%, comparable to many non-investment grade firms in advanced economies. Furthermore, the recovery rate of 72.2% surpasses several global benchmarks, signaling stronger-than-expected recovery potential in EMDEs. Despite reflecting the unique experience of MDBs and DFIs, this data provides critical insights for investors in areas typically lacking robust credit risk statistics.

The second publication breaks new ground by offering 40 years of data on default rates and, for the first time, recovery rates for sovereign and sovereign-guaranteed loans. This report shows an average annual default rate of 1.06% and an impressive recovery rate of 94.9%, reinforcing the stability of sovereign lending in EMDEs.

These statistics, now more granular than ever, address growing calls from the G20 and other global stakeholders for improved transparency in EMDE credit risks. By providing data at both the country and sector levels, as well as introducing new metrics, the GEMs Consortium aims to help investors better assess the risk landscape and make informed asset allocation decisions.

Román Escolano, Group Chief Risk Officer at the European Investment Bank, emphasized the significance of these publications, noting that they "help investors understand the risk profile of emerging markets," thereby facilitating greater private investment. Federico Galizia, Vice President of Risk and Finance at the International Finance Corporation, highlighted that these data challenge conventional beliefs, demonstrating that EMDE investments can be well within the risk tolerance of a broad spectrum of investors.

With developing countries requiring $4 trillion in annual investment to meet the Sustainable Development Goals by 2030, and $2.8 trillion annually for clean energy, these reports offer a vital resource for guiding investment decisions. Investors and credit rating agencies can use the disclosed default and recovery rates to refine their risk models, further supporting sustainable and impactful investments in emerging markets.

The full reports are available on the GEMs Consortium website at www.gemsriskdatabase.org.