Publication: Reassessing Risk in Emerging Market Lending: Insights from GEMs Consortium Statistics
Loading...
Date
2025-06-30
ISSN
Published
2025-06-30
Author(s)
Editor(s)
Abstract
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.
Link to Data Set
Citation
“Galizia, Federico; Lund, Susan Marie. 2025. Reassessing Risk in Emerging Market Lending: Insights from GEMs Consortium Statistics. IFC Research Note. © World Bank. http://hdl.handle.net/10986/43397 License: CC BY-NC 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Lending Concentration, Bank Performance and Systemic Risk : Exploring Cross-Country Variation(World Bank, Washington, DC, 2013-09)Using both market-based and annual report-based approaches to measure lending specialization for a broad cross-section of banks and countries over the period 2002 to 2011, this paper is the first to empirically gauge the relationship between bank lending specialization and bank performance and stability in an international sample. Theory suggests that banks might benefit from specialization in the form of higher screening and monitoring efficiency, while a diversified loan portfolio might also enhance stability. This paper finds that sectoral specialization increases volatility and systemic risk exposures, while not leading to higher returns. The paper also documents important time, cross-bank, and cross-county variation in this relationship, which is stronger post 2007, for richer countries, countries without regulatory requirements on diversification, banks with lower market power, and banks with more traditional intermediation models.Publication Unconventional Monetary Policy Normalization in High-Income Countries : Implications for Emerging Market Capital Flows and Crisis Risks(World Bank, Washington, DC, 2014-04)As the recovery in high-income countries firms amid a gradual withdrawal of extraordinary monetary stimulus, developing countries can expect stronger demand for their exports as global trade regains momentum, but also rising interest rates and potentially weaker capital inflows. This paper assesses the implications of a normalization of policy and activity in high-income countries for financial flows and crisis risks in developing countries. In the most likely scenario, a relatively orderly process of normalization would imply a slowdown in capital inflows amounting to 0.6 percent of developing-country GDP between 2013 and 2016, driven in particular by weaker portfolio investments. However, the risk of more abrupt adjustments remains significant, especially if increased market volatility accompanies the unwinding of unprecedented central bank interventions. According to simulations, abrupt changes in market expectations, resulting in global bond yields increasing by 100 to 200 basis points within a couple of quarters, could lead to a sharp reduction in capital inflows to developing countries by between 50 and 80 percent for several months. Evidence from past banking crises suggests that countries having seen a substantial expansion of domestic credit over the past five years, deteriorating current account balances, high levels of foreign and short-term debt, and over-valued exchange rates could be more at risk in current circumstances. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms and countercyclical macroeconomic and prudential policies to deal with a retrenchment of foreign capital. In other cases, where the scope for maneuver is more limited, countries may be forced to tighten fiscal and monetary policy to reduce financing needs and attract additional inflows.Publication The Long and the Short of Emerging Market Debt(2009-09-01)Emerging economies have tried to promote long-term debt because it reduces maturity mismatches and the probability of crises. This paper uses unique evidence from the leading case of Chile to study to what extent there is domestic demand for long-term instruments. The authors analyze monthly asset-level portfolios of Chilean institutional investors (mutual funds, pension funds, and insurance companies) and compare their maturity structure to that of US bond mutual funds. Despite being thought to invest long term, Chilean asset-management institutions (mutual and pension funds) hold large amounts of short-term assets relative to US mutual funds and Chilean insurance companies. Short-termism is not driven by lack of instrument availability or tactical behavior. Instead, it seems to be explained by the desire to minimize inflation risk and, more importantly, by manager incentives that tilt demand toward short-term instruments. Extending the maturity of emerging market debt may require reducing risk and reshaping investor incentives.Publication Mutual Fund Investment in Emerging Markets : An Overview(Washington, DC: World Bank, 2001-05)International mutual funds are key contributors to the globalization of financial markets and one of the main sources of capital flows to emerging economies. Despite their importance in emerging markets, little is known about their investment allocation and strategies. This article provides an overview of mutual fund activity in emerging markets. It describes their size, asset allocation, and country allocation and then focuses on their behavior during crises in emerging markets in the 1990s. It analyzes data at both the fund-manager and fund-investor levels. Due to large redemptions and injections, funds' flows are not stable. Withdrawals from emerging markets during recent crises were large, which is consistent with the evidence on financial contagion.Publication Financial-Stability Challenges in European Emerging-Market Countries(2011-08-01)This paper examines the financial-stability challenges that will most likely be faced by European emerging-market countries in adapting to the post-crises environment, including the new financial-stability architecture and the other remaining weaknesses revealed by the global and European crises. The paper first reviews the pre-crisis financial-stability architectures in Europe and across the globe and then identifies the key weaknesses revealed by the global crisis. It then describes the micro and macro-prudential components of the new European System of Financial Supervision and some of its design limitations (and only briefly mentions reforms designed to deal with sovereign debt problems). The paper then identifies ten key areas where there are remaining challenges of implementation and additional reforms: six areas pertaining to all countries in Europe as well as the other major financial centers and four areas more germane to emerging-market countries in Europe. In discussing these ten areas, the paper tries to differentiate the relative challenges faced by categories of emerging-market countries, and their possible links to the excessive build-up of vulnerabilities in the pre-crisis period as a potential source of lessons for policy going forward.
Users also downloaded
Showing related downloaded files
Publication Geopolitics and the World Trading System(Washington, DC: World Bank, 2024-12-23)Until the beginning of this century, the GATT/WTO system worked. Economic research provided a compelling explanation. It showed that if governments maximize the well-being of their own countries broadly defined, GATT/WTO principles would facilitate mutually beneficial cooperation over their trade policy choices. Now heightened geopolitical rivalry seems to have undermined the WTO. A simple transposition of the previous rationalization suggests that geopolitics and trade cooperation are not compatible. The paper shows that this is only true if rivalry eclipses any consideration of own-country well-being. In all other circumstances, there are gains from trade cooperation even with geopolitics. Furthermore, the WTO’s relevance is in question only if it adheres too rigidly to its existing rules and norms. Through measured adaptation to the geopolitical imperative, the WTO can continue to thrive as a forum for multilateral trade cooperation in the age of geopolitics.Publication Understanding the Experiences of Digital G2P Payment Recipients(Washington, DC: World Bank, 2025-07-01)Understanding the Experiences of Digital G2P Payment Recipients: A Qualitative Research Toolkit aims to facilitate the study of recipient experiences of Government-to-Person payments (G2P), with a view to informing policies and programmatic interventions across various contexts. Insights about recipient access and use of G2P payments can inform government decisions about the underlying G2P architecture and its role in advancing long term development outcomes around financial inclusion, women’s economic empowerment, government efficiency and resilience. Several World Bank task teams and researchers from partner organizations conduct qualitative studies on the digitalization of G2P payments to garner such insights. The intention of such studies is to identify and address barriers to the access and use of digital G2P payments from a recipient’s perspective .Publication Papua New Guinea Economic Update, June 2025(Washington, DC: World Bank, 2025-06-30)The World Bank’s Papua New Guinea (PNG) Economic Update offers a comprehensive evaluation of the country’s economy, highlighting the challenges and opportunities for sustainable growth, macro-fiscal stability, and development in the face of global trade and policy uncertainties (Part One). In its special focus (Part Two), the report delves into the agriculture sector in PNG, exploring its potential to enhance livelihoods and serve as a way of diversifying growth beyond the resource sector. This shift could foster job creation, boost exports, and reduce macroeconomic volatility, thereby promoting more inclusive growth. PNG experienced robust economic growth in 2024, surpassing the historical average, largely driven by the non-resource sector. Overall GDP growth reached 3.8 percent, mirroring 2023 but slightly below the structural peer average. The non-resource sector’s growth was fueled by increased agricultural production and higher commodity prices, particularly cocoa, coffee, and copra oil. Despite the reopening of the Porgera gold mine, its operation at lower-than-expected capacity has resulted in sluggish growth within the resource sector. Headline inflation experienced a notable decline to 0.6 percent, largely influenced by non-tradeable goods. However, core inflation, measured by the BPNG trimmed mean, increased to 3.3 percent, reflecting higher transport costs and the diminishing impact of education subsidies. In January 2024, the BPNG implemented a crawl-like exchange rate regime to enhance the convertibility of the kina and tackle ongoing foreign exchange shortages. This adjustment has allowed the kina to become more flexible, contributing to a reduction in its real overvaluation. The gradual depreciation of the kina is bolstering PNG’s external competitiveness. To ensure consistency with the new regime and keep inflation expectations in check, monetary policy generally remained tight throughout 2024 and in the first half of 2025. The depreciation of the kina, stronger foreign currency inflows from both the resources and agricultural sectors, along with various measures taken by the BPNG, have helped ease foreign exchange shortages. However, the combination of increasing interest rates, reduced liquidity, and delays in launching significant resource projects led to a notable decrease in private sector credit growth.Publication Modeling Spatio-Temporal Characteristics of Urban Heat in Bangkok(Washington, DC: World Bank, 2025-07-01)Urban areas accumulate heat, developing distinct urban climates that differ from the regional climate, leading to elevated mean air temperatures within cities. In tropical climates, such as Bangkok, this urban heat can contribute to high levels of heat stress. This study analyzes the spatial and temporal variation of air temperature in the Bangkok Metropolitan Administration (BMA) using dynamic climate modeling (WRF, v4.2). The analysis focuses on three distinct cli-matic periods: the cool and dry season (November–February), the hot and dry season (March–May), and the wet monsoon season (June–October). Results indicate that during sunrise in the cool and dry season, urban temperatures can be up to 6.4°C higher than those in surrounding rural areas. The highest temperature differences (>4°C) occur at night during this season, with over 50% of BMA’s urban area and population experiencing sustained exposure to these ele-vated temperatures. In contrast, the smallest temperature differences occur in the hot and dry season, despite it being the hottest overall, due to low soil moisture limiting rural cooling. Un-der specific conditions, an urban cool island (Turban < Turban) may develop during the daytime. Compact urban areas exhibit the most significant heating, although vegetated areas within BMA are also affected. These findings support the design of targeted mitigation strategies.Publication An EPIC Response(World Bank, Washington, DC, 2021-06-04)Floods and droughts take a staggering toll both in human suffering and in economic costs. A new approach thus is urgently needed to manage the large and growing risks associated with extreme hydro-climatic events. This report offers that new approach. It sets out a vision of how national governments can deal with these challenges through innovative governance, offering a comprehensive path towards a safer, more prosperous future for the world’s 7.7 billion people. This report focuses primarily on the last principle - a joined-up government. This report presents a new framework for creating a more effective system of managing hydro-climatic risks, a system that has the potential to dramatically reduce the future human and economic toll from these events. This report is intended to bring awareness of this enormous challenge and the potential solutions to a broad audience, as well as offering a practical and detailed guide to help governments improve their flood and drought management systems.