Reassessing Risk in Emerging Market Lending

Emerging markets have long been viewed as high-risk destinations for investment, particularly investments in companies. Although macroeconomic and political stability risks are higher, this perception also reflects project-level risks, or uncertainty about repayment prospects. Investors, with limited historical data and a lack of reliable metrics on the likelihood of default and recovery rates, approach emerging markets with great caution. The research challenges this view. Newly released statistics from the Global Emerging Markets Risk Database (GEMs), a consortium of 26 multilateral development banks (MDBs) and development finance institutions (DFIs) pooling their credit risk data, provides a way to analyze the risks in a more nuanced way. The statistics offer insights into default and recovery patterns for loans to emerging market firms over the past three decades, especially when investments are made alongside MDBs and DFIs. They also highlight the benefits of incorporating emerging market exposure into diversified investment portfolios