What If Emerging Markets Dodge the Default Wave?

Emerging markets are under pressure from rising debt, slowing growth, and soaring yields. Sri Lanka has already joined the ranks of Lebanon and Zambia with an historic failure to pay. But the panic may be overdone. Our model shows that risks concentrate in small economies, and that most big developing countries will likely remain immune even if pressure on frontier markets intensifies.

• We’ve built a model to quantify the risk of default in 41 emerging countries over the next 12 months. Eleven countries have a default probability above 10%, including Argentina, Ecuador, and Ethiopia.
• The most exposed nations constitute a small share (3%) of the world economy. Many, such as Pakistan and Ghana, are either seeking support from the International Monetary Fund or already receiving it. That should help contain contagion risks.
• Larger economies such as Brazil, India, Indonesia, and Mexico are immune even if pressure on vulnerable countries intensifies. Turkey may not be so lucky. This is a stark difference from the 1980s when large emerging markets got into trouble.