Emerging Market Defaults to Ease, Says JPMorgan

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JPMorgan revised its forecast on Monday, predicting a decline in the number of emerging market companies likely to default on their debt, driven by significant improvements in distressed market conditions not seen since 2016.

Following the resolution of some defaults and the non-materialization of others, 2024 is expected to mark the first year since the onset of the COVID-19 pandemic in 2020 that corporate default rates in emerging markets fall below historical averages.

The investment bank adjusted its forecast for high-yield or ‘junk’-rated EM corporate defaults to 3.6% globally, down from 4.0%, and to 2.1% from 2.9% specifically for firms in the widely-tracked CEMBI Broad Diversified index managed by another JPMorgan unit.

“Our outlook for the remainder of the year is more optimistic as previous default candidates have been resolved and new additions have been limited,” noted analysts in a research note.

While challenges persist, particularly in China’s property sector and among recurrent defaulters in Latin America, JPMorgan highlighted the absence of defaults in Ukraine this year despite ongoing conflict.

Regionally, Asia’s overall default forecast remained at 4.5%, with the CEMBI group projected at 2.5%. Latin America saw its forecast reduced by 1% to 4.6%, and to 2.8% for the CEMBI.

EM Europe’s forecast was adjusted to 2.0% from 3.0%, and to 2.3% for CEMBI BD HY, while the Middle East & Africa saw a slight increase to 0.6% from 0.5%, with the CEMBI reflecting a 0.5% rate.

The research highlighted increased investor optimism, noting a 7% decrease this year in EM firms considered ‘distressed’, defined by a 1,000 basis point risk premium or ‘spread’ on their bonds. This improvement is the largest seen in any calendar year since 2016, according to JPMorgan analysts.

“Even though 50% of bonds trading at distressed levels typically suggest a 12-month default rate of 4.6%, we believe this outcome is unlikely,” they stated. They attributed this caution to the disproportionately high distressed volume in China, where bond prices may not accurately reflect actual default risks.