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Emerging, Advanced Economies Show Similar Results in Corporate Default Rates

Corporate defaults come as no surprise in advanced economies, but a recently released Moody's Investors Service 20-year study found that the default numbers for emerging economies are quite similar to those in advanced economies after an in-depth review of more than 1,700 defaults in both markets around the world.

The Moody's report, released on March 28, showed about a 1% difference in the average annual corporate default rate between advanced and emerging economies since 1998—the latter remained on the high end at 3.7%. The study was conducted through the end of last year and indicated that while both economies had similar default numbers, the results occurred for different reasons.

"Sovereign and banking crises, currency volatility and exchange controls drove many emerging market corporate defaults in the last two decades, while defaults in advanced economies were more likely to result from adverse industry trends, competition and aggressive financial policies," Moody's Corporate Finance Group Senior Credit Officer Richard Morawetz said in the release. Morawetz was also the author of the report.

In the early years of the report, Moody's said, the aforementioned sovereign crises in emerging markets were seen in countries such as Brazil, Mexico, Argentina and India, which in turn, boosted default rates. Meanwhile, the most corporate defaults in advanced economies occurred in the Americas, specifically in part by the high number of rated entities in the U.S.

The highest number of defaults in advanced and emerging economies was recorded by Moody's at 254 in 2009, but has since decreased to 242 by the end of 2017.

"Missed interest or principal payments are the primary type of default in both regions," Moody's said. "By contrast, bankruptcy filings are more prevalent in advanced economies."

-Andrew Michaels, editorial associate

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Wednesday, 29 June 2022