JPMorgan Revises Downward Forecast for Emerging Market Corporate Defaults
On Monday, investment bank JPMorgan revised its projections for the number of emerging market companies anticipated to default on their debt, following significant improvements in distressed-level market pricing not seen since 2016.
2024 is poised to be the first year since the onset of the COVID-19 pandemic in 2020 where default levels among EM corporates are expected to dip below historical averages, attributed to resolved defaults and fewer new instances. Globally, JPMorgan reduced its forecast for high yield or ‘junk’-rated EM corporate defaults to 3.6% from 4.0%, and for firms in the widely tracked CEMBI Broad Diversified index, it adjusted the forecast to 2.1% from 2.9%.
“Our outlook for the remainder of the year has improved as previous default risks have diminished and new additions have been limited,” noted analysts in a research note.
While challenges persist primarily within China’s property sector and among recurrent defaulters in regions like Latin America, JPMorgan highlighted the absence of any defaults from Ukraine despite ongoing conflict.
Regionally, Asia’s overall default forecast remained at 4.5%, with the CEMBI group forecast at 2.5%. Latin America’s forecast was reduced by 1% to 4.6% overall and to 2.8% for CEMBI. EM Europe saw its forecast lowered to 2.0% from 3.0%, and to 2.3% for CEMBI BD HY, while Middle East & Africa saw a slight increase to 0.6% from 0.5%, with CEMBI at 0.5%.
The research note also highlighted a notable increase in optimism among international investors. The proportion of EM firms categorized as ‘distressed’—those facing a significant risk of default—has dropped by 7% this year, defined by a 1,000 basis point risk premium or ‘spread’ on their bonds.
“This marks the largest improvement in any calendar year since 2016,” added JPMorgan’s analysts.
While acknowledging the theoretical default rate implied by distressed bond pricing, JPMorgan expressed skepticism regarding this outcome, citing depressed bond prices in China that exceed actual default risks, accounting for more than half of the distressed volume.
