Last week marked a significant milestone in enhancing data transparency on development finance default and recovery statistics in Emerging Markets (EMs). The Global Emerging Markets Risk Database (GEMs), a joint initiative established in 2009 by the European Investment Bank (EIB) and the International Finance Corporation (IFC) to pool credit risk data, has, for the first time, disclosed deeper granularity in default and recovery statistics for private and public lending from 1994 to 2024. This development finance data disclosure comes at a critical moment when there is an urgent need to increase private investment in these markets to help bridge the Sustainable Development Goals (SDGs) and Climate Finance gap.
The GEMs consortium consists of 26 Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) operating in EMs. Historically, these markets have been perceived as high-risk by investors, and thus the release of this information is a key step towards challenging that perception. Access to the default and recovery rates from MDB and DFI portfolios in emerging markets will provide investors with a deeper understanding of the risk profiles of these markets. This, in turn, will guide risk and pricing models and encourage greater mobilisation of private capital towards EMs.
MDBs and DFIs can be considered the original impact investors. With decades of experience, extensive local knowledge, and robust safeguards in place, they are well-positioned to partner with private investors seeking both impact and returns. Private investors, especially pension funds, typically have long-term strategies and risk profiles that align with those of MDBs and DFIs.
Investing in private debt originated by MDBs and DFIs offers institutional investors the opportunity to achieve significant impact without sacrificing financial performance. It further enables them to diversify their portfolios. Data from the GEMs database shows that defaults in EMs have a low correlation with those in developed economies; the coefficient between GEMs default rates and those for S&P B-rated firms is 0.46, whereas the correlation for Moody’s B3-rated firms is 0.33 – showing relatively low correlation. This would suggest that firms in developed and emerging markets do not follow the same patterns, particularly in times of economic downturns.
The new GEMs report also delves into the credit performance of loans given to both private and public entities. It reveals that the average annual default rate for private sector loans stands at 3.56%, which is comparable to many non-investment-grade companies in developed countries. Interestingly, the average recovery rate for these loans is approximately 72%, surpassing many global standards. This is due to MDBs/DFIs’ unique business model, which includes specialised (local) expertise, rigorous due diligence, constructive recovery policy, and preferred creditor treatment.
More importantly, the report presents for the first time disaggregation by regions, countries, sectors, income, and currency. Of note, the lowest default rate is in financials, a cornerstone sector of the ILX portfolio. Similarly, the ILX portfolio is mainly exposed to lower and upper-middle-income countries. The average default rate of these countries is lower than the overall 3.56%. These findings, alongside the rest of the GEMs statistics on private lending, offer a thorough overview that the real credit risks in EMDEs, when investing alongside MDBs/DFIs, are lower than the perceived risks by investors.
Investing in EMs is not only essential for the green transition but also presents a great investment opportunity for institutional investors. Mobilising private capital is a crucial part of the efforts to close the SDG and Climate Finance gap and investing alongside MDBs and DFIs offers a risk-mitigated route to doing so. The disclosure of the GEMs database addresses one of the primary barriers to investing in EMs—data availability—making these markets more accessible to investors.
Find the full report here