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A new look at some very old data offers empirical evidence of something emerging markets investors, fund managers and business leaders already knew well: The risks of lending and investing in emerging markets are much lower than the capital markets generally perceive.
A rare data release of more than 15,000 emerging market credit transactions from from the Global Emerging Markets, or GEMs, database reveals that in 40 years of lending, the average default rate for non-investment grade borrowers in emerging markets was just 3.6% – roughly equal to companies given a B rating by S&P and Moody’s.
GEMs purports to be the “world’s largest credit risk databases for the emerging markets,” assembled from anonymized lending data from 26 multilateral development banks, or MDBs, and development finance institutions, or DFIs. The full dataset has never been publicly released, despite years of calls for access from both public and private institutions, which see the information on credit default and recovery rates as essential to getting more – and more lower-cost – capital and dealflow into underinvested markets.
The release of the anonymized, aggregated data set, however, only whet the appetite of those in the development finance field who have been pushing for even more transparency from GEMs, including the raw, disaggregated data from multilateral development banks and development finance institutions.
Thomas Venon of Eighteen East, an impact financial advisory firm, says the slow trickle of disclosures from GEMs and individual institutions is misaligned with the urgency of the moment.
“The question everyone keeps asking about each new release of GEMs data is, ‘Is this enough?’ Rather than trying to figure out what is the minimum amount of data MDBs and DFIs should share to catalyze mobilization, shareholders should insist that we start with the maximum amount that is available to be shared, and only then start discussing exceptions where necessary,” Venon tells ImpactAlpha.
“Because everytime someone decides to draw a line on how much data they will share, and how it should be aggregated, they’re depriving us of the creativity markets are capable of,” he adds. “Stonewalling has, in this context, a very real developmental cost.”
Risk profile
The GEMs’ data release is both an invitation for action and response to the growing pressure on development finance institutions and multilateral banks to mobilize more private financing to meet climate targets and the 2030 Sustainable Development Goals.
“These results suggest that investing in firms located in emerging markets is not as risky as might have been expected,” Susan Lund and Federico Galizia of the International Finance Corp. said in their analysis of the GEMs data. “The takeaway is clear: although emerging market corporates, on average, are not investment grade, they are lower risk than many high-yield corporate borrowers from advanced economies.”
DFIs and MDBs have long track records investing in markets and sectors that private institutions don’t have a presence or don’t know how to underwrite. Because they work with public money – and are increasingly being asked to take more risk and be more creative with how they deploy capital – they’re also able to be more experimental and concessional than commercial investors as a means to building market opportunities.
Having access to MDBs and DFIs deal data, says Roman Escolano of the European Investment Bank, helps “investors better understand the risk profile of such investments.”
“The publication today and sharing of information with public and private sector partners is a direct response to the call by the G20 for international financial institutions to support reform of the financial system by sharing data and expertise more widely,” adds EIB president Nadia Calviño.
Default rates
GEMs released the data as a downloadable spreadsheet of tables and charts on credit default and recovery rates categorized by year, region, country, public v. private borrowing entity, sector and income-level.
One can learn, for example, that the average annual default rate for emerging market energy investments is less than 1%, compared to communications services, which is about 5.1%. Or that energy investments in Latin America are less at risk of default (less than 2% annually) than in the Middle East and North Africa (4.1%).
Private borrowers in El Salvador have the lowest rate of default (0.2%); borrowers in Myanmar have the highest (15.9%). Cote d’Ivoire borrowers have a higher than average default rate (8.4%), but creditors and lenders have recovered more than 94% of their debt.
What one can’t learn from the data is, say, how utility-scale solar projects perform compared to wind or hydro projects, or how commercial banks perform in Africa relative to those in Latin America, or how well telecom companies in one Asian country service their debt relative to those in another country.
“We will soon find out if this [incremental] approach to data transparency will yield improved mobilization numbers,” Venon says.
“I would not be particularly comfortable pricing the credit risk of an insurance company in Uganda based on data pertaining to all categories of ‘financial institutions’ across all 48 countries that make up the sub-Saharan Africa region.”
Transaction transparency
When asked why they don’t disaggregate and disclose more of their deal data, DFIs and MDBs will argue that actually, they do.
Dutch development bank FMO, has an interactive world map on its website that highlights the vast majority of its investment funds and companies, the amount invested, reasoning behind the deal, and risk category. It publishes the amount its capital mobilizes, though only in aggregate, in its annual report, along with specific mobilization numbers for select transactions.
“As a regulated bank, we have a very clear accounting and disclosure framework,” including the International Financial Reporting Standards, the Corporate Sustainability Reporting Directive, and the European Sustainability Reporting Standards, FMO spokeswoman Monica Beek tells ImpactAlpha. “With our annual report, we adhere to these globally accepted accounting and sustainability disclosure standards.”
She adds that FMO recently updated its disclosure policy. “We are now focusing on making the data more accessible for our stakeholders, for example, restructuring the data on our website and making it easy to download the data into an Excel sheet.”
The US International Development Finance Corp.’s Transparency Committee has also approved additional project-level data disclosures that will soon be available for download on its website, an official at the DFC tells ImpactAlpha. As of now, its capital mobilization figures are also reported in aggregate, by region.
The IFC’s position is that disclosing transaction-level data, especially on capital level mobilization “presents distinct client and investor confidentiality considerations,” says spokesman Jim Rosenberg. “On a case-by-case basis, this information may be disclosed subject to third-party consent, and we include details of our partners and their involvement through press releases. But we cannot apply this approach universally.”
Reputational risks
Such “confidentiality considerations” present a persistent, and frustrating, obstacle for development finance professionals trying to move the needle on capital mobilization.
A new report from Publish What You Fund, a UK-based nonprofit that advocates for transparency in the humanitarian aid and development finance sectors, cited “confidentiality clauses” as one of the top reasons DFIs and MDBs oppose disaggregated data disclosures. The report follows a paper the organization released in April with recommended guidelines on how DFIs and MDBs should disclose capital mobilization information.
“Claims of commercial confidentiality are not only overused but are also contradicted by many in the private sector who support our disclosure proposal, including the identification of the mobilized party by typology,” states the latest report, “What works: How to measure and disclose private capital mobilization to increase private investment and close the SDG financing gap.”
In digging deeper, Publish What You Fund’s interviews for the report revealed that, in fact, “concerns around disclosure related largely to reputational risks rather than commercial confidentiality.”
This lack of transparency goes against sustainable development goals and the public interest, says Publish What You Fund’s Gary Forster. “DFIs are asking for more [government] money, and they’re doing it with the promise of mobilizing more capital. But we can’t see whether they are or not.”
Forster believes that since DFIs and MDBs operate with public money, they should be willing to disclose at least as much granular deal information as their private sector peers. For example: One private, paywalled database from LSEG Loan Connector, contains disaggregated information on more than 450,000 loans globally, with as many as 240 data fields.
Publish What You Fund’s recommendation to DFIs and MDBs “calls for disaggregation by investment (value and total mobilized), geography, instrument, sector, disaggregated amounts mobilized, the typology of the mobilized party, and identification of the type of mobilization.”
Unlocking capital
Rosenberg of the IFC tells ImpactAlpha that “while MDBs welcomed many of the methodology proposals in Publish What You Fund’s approach paper, IFC does not agree with some of their further recommendations on disclosure of transaction-level mobilization data.”
Meanwhile, private capital allocators, including Allianz and Pollination, seconded the recommendations. Pollination, a climate-focused investment and advisory firm, called them “in-line with private market practices and should enhance investor understanding of the capital solutions available to drive action in hard-to-reach markets and sectors.”
With the sheer volume of capital needed to meet the sustainable development goals and the climate challenge, better data is key to unlocking and deploying capital, stresses Venon.
“There’s a reason why in the scientific community, research is published. It’s to ensure that scientists all over the world have the information they need to come up with solutions to problems and to ensure that humanity progresses,” he says. MDBs and DFIs should apply the same principle to development finance.“No one knows who is going to come up with an idea that will help capital mobilization really take off,” Venon adds. “No one can foresee all of the solutions. We need to make as much data available as possible to unlock the market’s creativity.”
