The COVID-19 Pandemic and Emerging Market Restructurings: The View One Year Later

The COVID-19 pandemic obviously caused massive disruption in the global economy, and both advanced economies and emerging economies/developing countries (EMDEs) alike experienced major economic slowdowns last year.  Advanced economies experienced a larger decline in GDP      (-4.6 percent) in 2020 than the EMDEs (-2.1 percent) did in 2020, according to July 2021 figures from the International Monetary Fund (IMF), and yet this was the first economic contraction experienced by the EMDEs in many years.

A number of individual EMDE countries witnessed GDP declines much larger than the overall GDP decline for EMDEs as a whole.  For example, in Latin America, the three largest economies—those of Brazil, Mexico, and Argentina—each experienced significant GDP declines in 2020 estimated to be approximately -4.1 percent, -8.3 percent, and -9.9 percent, respectively, according to June 2021 data from the World Bank.  Similarly, two of the three largest economies in Sub-Saharan Africa—those of Angola and South Africa—also experienced major declines in GDP in 2020 estimated to be approximately -5.2 percent and -7.0 percent, respectively, as per the World Bank’s June 2021 data.

Nonetheless, EMDEs are expected to undergo a relatively healthy economic rebound this year, with the World Bank recently projecting 6.1 percent GDP growth in 2021 and the IMF recently projecting 6.3 percent GDP growth in 2021. To be certain, though, any such projections for the performance of EMDEs in the near term are subject to potential downside risks given the relatively low vaccination rates and the uncertain future trajectory of the COVID-19 pandemic in EMDEs. Specifically, in recent months, India and Indonesia, for example, have been hard hit by the spread of the Delta variant, and it is certainly not beyond the realm of possibility that other EMDE countries will find themselves affected in the coming period by the Delta variant (or any other new variants that may emerge) which in turn could potentially have an adverse impact on the relative economic prospects of such EMDEs. 

At the outset of the pandemic, one might have expected—and, indeed, many observers predicted—that the contraction in economic activity for the EMDEs wrought by the pandemic would have yielded a multitude of new debt restructurings and/or debt defaults at both the sovereign and corporate levels. Yet, even though as to emerging market sovereigns there were a record number of debt defaults, there was not the tsunami of emerging market debt defaults and debt restructurings on the corporate side that many observers had expected.

In large part, the actions of governments and financial institutions may have helped forestall such a surge in corporate debt defaults and corporate debt restructurings by mitigating the economic impact of the pandemic and by creating a more forgiving environment for corporate borrowers in the face of the pandemic. In particular, a number of governments around the world, to the extent that they had the capacity to do so, provided stimulus to their economies through fiscal and monetary policy, and many governments also relaxed various insolvency law requirements (such as the requirement that companies file for insolvency when facing financial distress). Further, for their part, many financial institutions granted forbearance to their corporate borrowers with respect to required debt service payments.

In a new article ‘The COVID-19 Pandemic and Emerging Market Restructurings: The View One Year Later’, I discuss the restructuring landscape in the emerging economies in the wake of the COVID-19 pandemic, with a particular focus on sovereign debt restructuring and corporate debt restructuring in these economies. 

I review sovereign debt defaults and restructurings involving serial defaulters (eg, Argentina), failing (if not failed) states (eg, Venezuela and Lebanon), and states in Sub-Saharan Africa (eg, Zambia) where the interests of Chinese lenders may conflict with the interests of a sovereign’s other lenders. I also discuss why the corporate debt default and restructuring environment has been so muted over the last year and why that dynamic may not hold for much longer once governments and financial institutions begin to unwind the special measures they took to address the fallout from the pandemic.

The article, which can be found here, originally appeared in International Insolvency & Restructuring Report 2021/22 published by Capital Markets Intelligence and is linked here with permission of the publisher.  A version of this post previously appeared in the Harvard Law School Bankruptcy Roundtable on July 20, 2021 and Columbia Law School’s Blue Sky Blog on August 10, 2021.

Steven T. Kargman, a leading expert on international restructurings, is the Founder and President of KARGMAN ASSOCIATES, New York City.