World Bank credit default data aims to fuel emerging market private investment

For the first time ever, the World Bank has made public credit risk statistics spanning more than three decades of lending to help drive more private sector investment in emerging and developing economies.

The newly released statistics published by two organisations within the World Bank Group include default rates for private sector borrowers categorised by credit ratings, as well as default and recovery rates for sovereign borrowers.

The International Bank for Reconstruction and Development will share sovereign default and recovery rate statistics dating back to 1985 to help credit rating agencies and private investors gain a better understanding of its credit risk profile.

These statistics are unique to the IBRD due to its global portfolio and long historical record. Additionally, the International Finance Corporation will provide private sector default statistics compiled over nearly 40 years, broken down by internal credit rating. 

“The publication of this data is aimed at one goal: getting more private sector capital into developing economies to drive impact and create jobs,” said World Bank president Ajay Banga in a statement. 

An IFC spokesperson told The Banker that redirecting even a small portion of the $422tn managed by major investors to emerging markets would have a big impact in terms of creating jobs and providing the $4tn in annual investment needed to achieve the Sustainable Development Goals. 

“Of course, taking action against climate change is one of the SDGs that would be helped by this capital,” the spokesperson said.

However, it is important to keep in mind that investors need more than just encouraging statistics, the spokesperson added. “They seek regulatory certainty, political risk insurance, foreign exchange risk mitigation and other factors relating to the investment climate — all of which, when put together, will help them assess their risk-reward premiums when deciding on emerging market investments.”

Last month, British International Investment published its latest Emerging Economies Climate Report, which revealed that 98 per cent of corporates, financial service providers and investors in Africa, Asia and the Caribbean believe better investment is needed to help emerging economies transition to net zero or become more climate resilient. 

But at a time when emerging economies need more investment, Michael Jacobs, visiting senior fellow at think-tank ODI, warned that money is flowing out of the developing world and going back to the Global North because of rising interest rates.

Yet the credit risk statistics published by the World Bank suggest that private investors may not be investing in emerging economies due to perceived high risk.

From 1986 to 2023, the IFC’s private sector portfolio had a “low default rate” of 4.1 per cent, the World Bank said in a statement, which it said highlights the untapped potential and resilience of private sector investments in emerging markets.

The highest historical default rates were observed in 1986 and 2003, reaching 11.5 per cent and 10.3 per cent, respectively, according to IFC data. Africa exhibited a rate of 6.7 per cent, driven primarily by investments in the earlier part of the observation period, while all other regions ranged between 3.2 per cent and 4.5 per cent. Low-income economies exhibited the highest default rates, at 8.6 per cent.

For investments rated as “weak” by the IFC’s internal rating system, the default rate was 2.6 per cent during the period between 2017 and 2023, indicating that even investments considered higher risk can perform “better than could be expected”, the World Bank said.

For sovereign borrowers, defaults are “rare”, according to the World Bank, averaging just 0.7 per cent annually. Given its “preferred creditor status”, the World Bank typically recoups more than 90 per cent of amounts owed, including both principal and interest. 

According to World Bank data, sovereign default losses ranged from 0.01 per cent to 58.5 per cent, reflecting the effect of interest rates and the length of time in default.

The World Bank Group published the credit risk statistics as a complement to the recently published Global Emerging Market Risk Database report on recovery statistics to encourage more investors to put their capital into emerging markets — either on their own or co-investing with the bank.