The combination of the war between Russia and Ukraine as well as China’s ongoing real estate slump may spark the worst wave of corporate defaults since the 2009 global financial crisis, JP Morgan warned.
A bank article estimated that the default rate in emerging markets would reach 8.5%, more than double the 3.9% they expected before the war.
The volume of emerging-market high-yield corporate bonds on international markets, now trading at risky levels, has soared to $166 billion, the highest figure since 2009, when the global financial crisis raised default rate to 10.5 percent.
They forecast Eastern Europe to record a record default rate of 21.1%, with Ukraine and Russia expected to post rates of 98.8% and 27.3%, respectively, as businesses struggle due to war and sanctions.
Ukrainian companies have provided frequent updates to investors since the start of the invasion and all have painted a similar picture of their operations: exports are disrupted, while revenue generation and collections are decimated.
Problems in the real estate sector in China, meanwhile, have caused the forecast for the default rate in Asia to be raised to 10% from 7%.
This year is expected to see $32 billion in defaults by 29 struggling Chinese developers. This would mean a 31% default rate for the sector and, added to the $49 billion of defaults by 26 companies last year, would mean that half of China’s high-yield real estate bonds will have defaulted.
“Coupled with the 30% default rate recorded last year, we could see more than half of the sector decimated,” JP Morgan noted.
The investment bank expects the rest of the emerging market high-yield corporate space to see a modest 1.1% default rate this year.
Latin America’s forecast is less than 3% and the Middle East and Africa’s is less than 1%, compared to 0.75 and 1.50% for the US and European high-yield markets.