JPMorgan lowers emerging market default forecast

JP Morgan revised its forecast for emerging markets (EM) corporate defaults on Monday, citing the most significant improvement in distressed-level market pricing since 2016.

The bank now expects 2024 to be the first year since the onset of the COVID-19 pandemic in 2020 that EM corporate defaults will fall below the historical average.

JP Morgan reduced its global high yield or ‘junk’-rated EM corporate default forecast to 3.6 per cent from 4.0 per cent, and for firms in the CEMBI Broad Diversified index, to 2.1 per cent from 2.9 per cent.

Analysts noted lower risks for the rest of the year as some defaults had already occurred and new additions were limited.

Issues remain concentrated in China’s property sector and among repeat defaulters in Latin America, though Ukraine has not defaulted despite the ongoing war. The regional forecasts were adjusted with Asia’s left at 4.5 per cent, Latin America’s cut to 4.6 per cent, EM Europe’s lowered to 2.0 per cent, and the Middle East and Africa slightly increased to 0.6 per cent.

The note emphasised growing investor optimism, as the share of distressed EM firms—those with a 1,000 basis point risk premium on their bonds—dropped by 7 per cent this year, marking the largest improvement since 2016. Analysts believe that, despite distressed trading levels, actual default risks, particularly in China, are overestimated.

Attribution: Reuters