The last few years have seen a succession of challenges to emerging markets, from the global pandemic, to rampant developed-market inflation, aggressive central bank rates campaigns and the strong U.S. dollar. However, emerging market (EM) corporates have shown exceptional coping skills, recently exhibiting credit improvement that we expect to continue this year and beyond.
In 2024, EM corporate bonds saw their most significant positive credit rating shift since 2012. This improvement was driven by broad-based rating upgrades totaling $186 billion, surpassing rating downgrades of $117 billion and resulting in a net positive rating increase of $70 billion or 2.8% of EM corporate bonds outstanding.1 These upgrades primarily arose from healthier corporate fundamentals, showcasing what we consider EM corporates’ competent management of both operations and leverage levels, amid the challenges noted above.
Regional Dynamics
Asia, for example, saw its first positive credit quality trend since 2019. Korean industrial companies extended their technological leadership, gaining market share and improving profit margins, which led to ratings upgrades. In India and Indonesia, corporates used free cash flows and accessed the buoyant equity markets to reduce debt. Meanwhile, in Macau, improved visitor numbers and spending led to gradual deleveraging and rating upgrades for casino operators. Looking ahead to 2025, we remain optimistic on Asia, given the diminished index weight of China’s troubled property sector, strong growth in India and a smooth political transition in Indonesia.
Latin America presented a mixed picture in 2024, with a net negative rating shift due mainly to sovereign downgrades in Peru and Panama. However, the region also saw “rising stars” upgraded from high yield to investment grade, showcasing diverse credit dynamics. Notably, many Brazilian and Argentine corporates are constrained by sovereign rating ceilings despite their higher standalone credit ratings. The increase of these ceilings in Brazil and Argentina facilitated some corporate upgrades in 2024, a trend that has continued this year.
Central and Eastern Europe, the Middle East and Africa (CEEMEA) have delivered the most positive net rating volume in 2024. Several large bond issuers across sectors received favorable rating adjustments due to an improving earnings outlook. Despite regional conflicts, infrastructure sectors in the region exhibited resilience, driven by strong demand, as did the real estate sector. In our view, Turkey's improving macroeconomic outlook provides further potential for positive rating actions.
Stepping Back
Overall, we see strong evidence of improvement in EM corporates' standalone credit quality, as over 70% of the upgrades in 2024 were in non-sovereign names. (Defaults are down, too—see here.) This improving credit quality profile is reflected in the composition of the J.P. Morgan Corporate Emerging Markets Bond Index,2 where bonds rated A and above now constitute a 37% weighting compared to an average of 32% over the last five years.3 This trend of rating improvement suggests that EM corporate credits are better prepared than ever to navigate today’s complex global situation.
EM Corporates Show Rating Improvement
Trailing Three-Month Credit Rating Migration Rate
Source: BofA Securities, January 2025. Migration Rate refers to the sum of rating actions out of the total number of issuers in the index. For example, an issuer is upgraded by one rating agency by two notches and kept unchanged by others, this results in (2+0+0)/3 = +0.67 added to the calculation, The scores for all issuers are netted each month and the subtotal is divided by the number of issuers in the index. A +1.0 migration rate is equivalent to 1% of issuers upgraded by one notch or 0.5% of issuers upgraded by two notches or any other combination that results in a product of +1.0.
