Newly released data from the Global Emerging Markets Risk Database (GEMs) Consortium, which includes 26 multilateral development banks and development finance institutions, challenges the long-held belief that investing in emerging markets is excessively risky.
The data, covering 15,000 loans over 30 years,reveals that the risk of default in emerging markets, including the Asia-Pacific region, is comparable to that of non-investment grade companies in advanced economies.
The GEMs data, spanning from 1994 to 2023, includes loans to private companies across various sectors such as transportation, energy, manufacturing, and financial services. In the Asia-Pacific region, this comprehensive dataset provides valuable insights into default and recovery rates, showing that the average default rate of 3.6% is similar to that of high-yield corporate borrowers in developed markets. This finding suggests that the perceived risk of lending in emerging markets may be overstated.
One key takeaway from the GEM statistics is the diversification benefit of including emerging market assets in investment portfolios. The data shows that default rates in emerging markets do not always correlate with those in advanced economies, particularly during economic downturns. For instance, during the 2008 global financial crisis, defaults in the Asia-Pacific region were less severe compared to those in advanced economies, highlighting the potential for risk mitigation through diversified investments.
The GEMs data also reveals higher-than-expected recovery rates for defaulted loans, with an average recovery rate of 72%. This is particularly relevant for investors in the Asia-Pacific region, where local expertise and strong relationships with borrowers, facilitated by MDBs and DFIs, contribute to better recovery outcomes. These findings encourage a reassessment of the risks associated with investing in emerging markets, suggesting that such investments can be more secure and profitable than previously thought.
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