JPMorgan warns 10% of junk-rated emerging markets facing debt crises this year

Wednesday, 25 May 2022 00:00 - - {{hitsCtrl.values.hits}}

LONDON (Reuters): Rising borrowing costs and the worldwide fallout from the Russia-Ukraine war could see up to 10% of riskier ‘junk’-rated emerging market countries suffer debt crises this year, analysts at U.S. investment bank JPMorgan have warned.

More acute balance of payment pressures and larger fiscal deficits are now compounding problems for heavily indebted countries that import most of their energy and food.

Sri Lanka has just suffered its first ever sovereign default, joining a list that already included Lebanon, Suriname, Venezuela and Zambia. Russia and Ukraine are both teetering too, and the worry is the numbers globally will soon balloon.

“Nearly half of the country sample is classified as carrying high repayment risk in our assessment. Of these, eight are at risk of reserve depletion by the end of 2023, signalling high default risks. These are Sri Lanka, Maldives, Bahamas, Belize, Senegal, Rwanda, Grenada, and Ethiopia,” said the note led by strategist Trang Nguyen on Tuesday.

A jump in world interest rates in response to fast-rising inflation also means many countries are facing the reality of rising borrowing costs, a departure from over a decade of so-called ‘easy money’.

“Accounting for risks of a potential default in Russia and restructuring in Ukraine...the EM sovereign HY default rate could reach 10% this year,” JP Morgan’s note added, also pointing out how Ethiopia was moving towards a G20-led restructuring of its debts. The International Monetary Fund too has said that nearly 60% of low-income countries are either in, or at high risk of, debt distress.

Analysts at investment firm Tellimer this week highlighted how a record 27 emerging market countries now have eurobond yields above 10%.

Those yields are a proxy for what a government has to pay to borrow in the international capital markets and anything above 10% is generally seen as a sign of trouble.

JP Morgan said that in addition to the eight countries flagged as in immediate default danger, larger economies such as Egypt, Ghana and Pakistan were also highly vulnerable from fiscal and debt standpoints over the slightly longer term.