Institutional investors have long viewed Emerging Markets and Developing Economies (EMDEs) as high-risk investment opportunities, shaped by concerns over currency volatility, political instability, unfamiliar legal frameworks, and limited liquidity. While liquid EM bonds attract some capital, private lending remains underfunded—despite being critical for financing sustainable development and climate goals.
The Global Emerging Markets Risk Database (GEMs), a collaborative initiative of 29 multilateral development banks (MDBs) and development finance institutions (DFIs), is changing this narrative, often powered by lack of reliable, long-term data. By pooling decades of credit risk data, GEMs provides a clear, evidence-based picture of lending risk in EMDEs. Here’s what the latest data tells us:
1. Default Rates Are Lower Than Perceived
GEMs data shows an average default rate of 3.54% across $500 billion in MDB/DFI-backed private loans, comparable to developed market benchmarks. Defaults peaked during the late 1990s but have stabilised at 3.29% over the past decade, reflecting structural reforms and market maturation.
2. Recovery Rates Are Exceptionally Strong
Even when defaults occur, MDB-backed loans recover well. The average recovery rate stands at 72.9%, with over 50% of defaults recovering 90–100% of principal. This resilience is driven by MDBs’ preferred creditor status, due diligence, and long-term engagement strategies.
3. Sovereign Ratings Overstate Risk
Conventional credit models often rely on sovereign ceilings, but GEMs data proves these are misleading. For example, low-income countries show actual default rates of 7.2%, far below the 31.1% implied by sovereign ratings. Well-structured projects can pierce the sovereign ceiling, offering better credit quality than national ratings suggest.
4. Diversification and Resilience Through Crises
EMDE lending exhibits low correlation with developed market high-yield benchmarks (0.33–0.46), making it a powerful diversification tool. Even during global shocks—such as the 2008 financial crisis and the COVID-19 pandemic—EM defaults remained contained compared to developed market high-yield bonds.
5. Sector Strength
Financial institutions have the lowest default rates (2.3%) and highest recoveries (79.1%). Utilities, including renewables, also show robust performance, with renewables averaging 3.05% default rates and 70% recovery rates—a compelling case for investors seeking impact alongside returns.
The GEMs dataset dismantles long-held assumptions about EMDE risk. MDB/DFI-backed private lending offers comparable default rates, superior recovery outcomes, and strong diversification benefits. For investors, this means an opportunity to align portfolios with sustainable development goals without sacrificing performance.
Learn more about GEMs here