Emerging markets private credit is positioned to deliver investors returns comparable or superior to those generated from the three major emerging markets credit dislocations of the last half century. Moreover, current and imminent emerging market credit dislocations are likely to offer a deeper and more prolonged and strategic opportunity than in developed markets.
Importantly, given the severe economic impact of COVID-19, private credit can provide much-needed capital solutions to emerging market companies under strain, helping to preserve jobs and restart economic activity.
The global financial crisis of 2008 impacted emerging markets, but emerging markets were never central to that crisis. As a result, liquidity returned quickly and the opportunity for distressed investors was relatively short-lived. The Latin American debt crisis and the Asian financial crisis offered more opportunities for emerging markets distressed investors than the GFC, but these were mostly confined to each region. By contrast, COVID-19 is a global phenomenon that has exacted a human cost and a decline in economic activity that is unprecedented in the modern era.
Developed market countries are obviously better positioned than EM countries to deal with the health-care implications of the pandemic. Similarly, advanced economies can more easily provide significant fiscal stimulus to lessen the economic shock, including to low-income workers and small- and medium-size enterprises. Moreover, central banks in developed markets have injected liquidity into financial markets and, perhaps more importantly, introduced programs to lower the risk of unintentionally bankrupting firms that have lost access to credit. It is therefore not surprising that investment-grade corporates in developed markets have already regained access to capital markets in the past two weeks.
First, it is important to recognize that EM private markets were already experiencing considerable capital shortage before COVID-19, especially outside of Asia. While easy monetary conditions in developed countries fueled inflows into EM public markets for much of the past decade, private investors have retreated from emerging markets due in large part to the failure to anticipate or mitigate the potential impact of sharply weakening currencies (the J.P. Morgan EM Currency index has declined about 45% since 2011).
COVID-19 is of course exacerbating these already tight financial conditions. Widespread shutdowns to halt the spread of the virus mean emerging markets will face lower domestic consumption and lower export revenues on top of the human toll of this crisis, with countries reliant on commodities or tourism suffering the most. Already strained governments will have to weigh the need for fiscal stimulus against the risks of looser fiscal policy, including potential rating downgrades, currency weakening, higher inflation, higher real rates and sovereign defaults.