IMF, World Bank Expect Emerging Market Defaults


The International Monetary Fund (IMF) and the World Bank are meeting to discuss providing billions of dollars in funding to avoid corporate defaults on a global scale.

Leaders of the IMF and the World Bank are meeting in Azerbaijan, an energy-dependent country, to discuss how they can help companies in emerging markets that depend on rising commodity prices.  Those companies are facing high recessionary conditions, such as in Brazil and Venezuela, falling foreign investment and foreign capital inflows, as in central Asia and Latin America, or falling growth rates, as in China and Asia.

A potential powder keg of risks sits within the large, often government-supported companies in these nations, whose low efficiency and productivity leave them particularly dependent on national support in lean times. Yet currency pressures in large emerging markets, most notably in China, are limiting how much financial support those countries can offer their state-owned and state-supported enterprises (SOEs and SSEs).

As a result, the IMF and World Bank are planning to step in and provide support.

Billions in Emergency Loans

Financial Times reports that both bodies will make a $4 billion emergency loan package available to weak corporations in emerging markets, although some analysts suspect the actual loans required are much higher and that it will pressure both bodies to offer significantly more funding in the near term.  The World Bank said the meeting and its actions to support emerging nations are "in response to the pressure on the local currency and low oil prices," while many analysts warn that default rates in emerging markets are only going to expand, as they have done over the past 18 months.

Emerging Market Weakness

Emerging market equities are nearly 20% down from their late-2015 highs and are over 32% down from their 2015 height, according to the MSCI Emerging Markets Index. At the same time, the U.S. Dollar (USD) is up 6.3% from its lowest point in the last year, which was exactly a year ago.

The weakness partly reflects a fear that a lack of liquidity will hurt emerging markets. Foreign investors are less eager to invest in these markets due to the strengthening dollar, providing limited capital access for firms. Additionally, dollar-denominated bonds in emerging markets are placing pressure on firms' balance sheets, as their local currency-denominated revenues become less valuable relative to their USD-denominated liabilities to investors.

In response to this troubling dynamic, the People's Bank of China auctioned 340 billion yuan of reverse-repurchase agreements on Thursday, shortly after auctioning 440 billion yuan two days before.  The sudden injection of $118 billion worth of reverse-repos adds significant cash to the Chinese economy, providing companies that owe in U.S. dollars liquidity.

The move has made little impact on the renminbi, which has already climbed significantly after months of consistent devaluation, bringing the exchange rate to 6.58 per USD.