The Restructuring Landscape in Emerging Markets One Year into the Pandemic

Like advanced economies, emerging economies were buffeted by the global economic slowdown stemming from the COVID-19 pandemic and the associated lockdowns of national economies. In 2020, emerging economies (and developing countries) contracted by 2.1 percent (their steepest decline in many years), but the decline was not as severe as in advanced economies (-4.6 percent), according to the latest data from the International Monetary Fund (IMF), released in July 2021 as part of its World Economic Outlook Update.

Emerging economies and developing countries taken as a whole are expected to experience a major rebound this year, with anticipated growth reaching an estimated 6.0 percent (according to June 2021 projections from the IMF) or an estimated 6.3 percent (according to July 2021 projections from the IMF). However, the aggregate numbers mask certain less positive realities.

First, China accounts for the lion’s share of this projected overall growth, and, without China, the growth rate for emerging economies and developing countries would be approximately 1.5 percent lower, dropping from a projected 6.0 percent to a projected 4.4 percent, according to June 2021 forecasts from the World Bank.  Second, notwithstanding the overall economic rebound expected for emerging economies and developing countries, their projected economic growth this year will still be a few percentage points lower than what had been projected in the pre-COVID economic forecasts for this year.

Third, the emerging economies and developing countries have likely suffered what economists refer to as “scarring” from the pandemic: longer-term deleterious economic and social effects.  Due to strained balance sheets, national governments were forced to postpone investments in infrastructure, which over time could be a drag on the economic development and growth prospects in these economies and countries.

Similarly, many struggling businesses in these economies and countries did not make the necessary capital expenditures for maintaining and purchasing plant and equipment, and that is likely to affect productivity levels in the future. Further, the closure of schools around the world caused tens of millions of children in these countries to fall behind in their educations, and over the longer term this could represent a serious blow to the development of human capital in these countries.

Certain emerging market economies face very specific vulnerabilities. For instance, many of them depend heavily on tourism and the hospitality industries, and the disruptions to international travel over the last year caused them to lose many international tourists and the associated revenues and foreign exchange. Moreover, this problem may persist for a while since international air travel is not expected to return to pre-COVID levels for a couple of years at least.

In a new article, “The COVID-19 Pandemic and Emerging Market Restructurings: The View One Year Later,” I provide an overview of the challenging economic landscape that many emerging economies still face in the wake of the pandemic. I also discuss current sovereign and corporate debt restructuring issues in emerging economies.

On the sovereign debt front, my article explores the challenges facing three types of sovereigns: serial defaulters like Argentina, failing (if not failed) states like Venezuela and Lebanon, and African states, particularly in Sub-Saharan Africa, like Zambia, where the interests of Chinese lenders and other creditors might conflict in future sovereign debt restructuring situations.  While 2020 set a record for sovereign defaults and sovereign credit-rating downgrades, it is widely expected that the coming years will also bring a spate of sovereign defaults or sovereign debt restructurings.  Indeed, the international financial institutions such as the IMF have identified many emerging markets and developing countries that are already in a state of debt distress or at high risk of debt distress in the future.

Notwithstanding the economic fallout from the pandemic, the emerging economies and developing countries did not see the uptick in corporate defaults and restructurings that some, if not many, observers expected. Yet, expansionary fiscal and monetary policies, the relaxation of national insolvency law requirements (including, in particular, requirements for companies to file for insolvency when they are facing financial distress) and other changes to national insolvency laws, and loan forbearance by financial institutions, may all have contributed to the subdued insolvency and restructuring environment.

Even so, this relative quiescence may not continue for much longer if these policies of governments and financial institutions are unwound in the near future. Such changes could bring a surge in restructurings and insolvency filings and an associated build-up of non-performing loans (NPLs) in the banking systems of these economies.

Nonetheless, the court systems in many of the emerging economies and developing countries may not be well prepared to deal with a surge in insolvency cases. Thus, these economies may need to rely more on out-of-court restructurings to address any widespread financial distress that might emerge in their corporate sectors.

This post comes to us from Steven T. Kargman, president of Kargman Associates/International Restructuring Advisors. It is based on his recent article, “The COVID-19 Pandemic and Emerging Market Restructurings: The View One Year Later,” available here. The article was originally published in International Insolvency & Restructuring Report 2021/22 and is linked here with the permission of its publisher, Capital Markets Intelligence. A version of this post appeared in the Harvard Law School Bankruptcy Roundtable on July 20, 2021.

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