Rising Concerns Over Emerging Market Corporate Bonds Amid COVID-19 Impact: "Default Risks Increase"

[Asia Economy Reporter Jeong Hyunjin] Emerging market companies are expected to face a sharply increased likelihood of default within the next 12 months due to the impact of the novel coronavirus infection (COVID-19). It is analyzed that the global economic recession will push already struggling emerging market companies into a crisis situation.

According to Bloomberg and others on the 11th (local time), credit rating agency Moody's forecasted that the default rate of all speculative-grade corporate bonds in emerging markets over one year until March next year could rise to 13.7% in the worst case. Considering that the default rate was 13.6% during the 2008 global financial crisis, it is interpreted that the possibility of default has increased further due to the COVID-19 situation.

The current rate stands at about 2.2%. However, assuming the worst-case scenario by the end of the year, it is expected to rise to 11.2%, then exceed 13% by March next year. In the best-case scenario, the default rate is expected to rise to 7.8% by the end of the year and 8.3% by March next year. Previously, the default rate of speculative-grade corporate bonds in emerging markets was relatively low at around 0.8% last year. At that time, only seven companies defaulted, including Jamaica’s telecommunications company Digicel and three Chinese companies.

Joyce Jang, a Moody's analyst who authored the report, analyzed, "Due to the global spread of COVID-19, many countries closed workplaces and restricted social interactions," adding, "The collapse in demand has reduced the profitability and liquidity of emerging market companies." Kumar Kantan, Moody's credit strategist, mentioned that "so far, the default rate has not shown an increase due to the COVID-19 pandemic," but pointed out retail, oil, and gas sectors as areas with high default risk.

Retail, oil, and gas sectors were also mentioned by JP Morgan as high-risk areas. In a report released the previous day, JP Morgan adjusted the yield spread forecast between emerging market corporate bonds in these sectors and U.S. Treasuries from the previous 4.35 percentage points to 7 percentage points. U.S. Treasuries are representative safe assets, so a widening yield spread means increased risk in corporate bonds. In a situation where the global real and financial economy is plunged into recession due to COVID-19, speculative-grade bonds are expected to pressure companies, increasing the likelihood of default.

The market already has a higher proportion of speculative-grade corporate bonds since the 2008 global financial crisis. According to Moody's, as of the fourth quarter of last year, the proportion of speculative-grade bonds among all companies was 63%, which is 9 percentage points higher than the 54% recorded in the fourth quarter of 2007, ten years earlier.

However, some in the market consider Moody's forecast to be excessive. Charles de Quinsonas, fund manager at M&G Investments, said, "We expect defaults to be in the mid-single digits," explaining that emerging market companies strengthened their asset positions last year and are expected to manage the situation.

Jan den Research, head of research at asset management firm Ashmore, pointed out that emerging market high-risk companies have higher cash holdings than U.S. speculative-grade companies, explaining that they are "in a better position to respond to shocks." He added, "The International Monetary Fund (IMF) also expects emerging markets to perform relatively better than advanced economies," and forecasted that "most emerging market economies are likely to experience a relatively 'V-shaped' recovery."

This content was produced with the assistance of AI translation services.