How Emerging Market Companies Are Withstanding Global Interest Rate Shifts

Global interest rates have gyrated since 2019, driven by large-scale economic shocks that have shifted the macroeconomic outlook and provoked a series of monetary policy responses. Prior to the COVID-19 pandemic, policy rates in most advanced economies were low or near zero, and nominal government bond yields were often negative. In March 2020, a sharp rise in uncertainty prompted the largest central banks to flood global markets with liquidity. Policy rates remained near zero until a surge in inflation worldwide sparked a tightening cycle. Although inflationary pressures have lessened, and central banks have begun easing—notably with a 50-basis point rate cut by the U.S. Federal Reserve in late September 2024—key global interest rates are projected to remain well above pre-pandemic levels in real terms.

How have emerging market companies fared? This IFC Research Note analyzes the cost of borrowing for firms in emerging and developing economies, changes in their debt structure, and indicators of indebtedness and profitability. It finds reasons for optimism on their resilience, while noting that vulnerabilities remain. In contrast to earlier periods of heightened macro volatility and Fed hiking cycles, emerging market corporate yields rose significantly but spreads over U.S. Treasuries remained stable. Moreover, there was a noticeable shift by emerging market firms toward local currency borrowing to eschew vulnerabilities from foreign currency denominated debt. As a result, interest coverage ratios for emerging market companies are still healthier than on the eve of the pandemic. Nevertheless, borrowing costs warrant monitoring because corporate debt levels remain high and, despite recent policy rate cuts in the United States and elsewhere, global real interest rates are projected well above pre-pandemic levels in the next few years.

Impact of Global Interest Rates on Borrowing Costs for Emerging Market Companies 

Spreads between emerging market corporate yields and U.S. Treasuries have remained relatively stable, even as global interest rates fluctuated. Since 2019, U.S. dollar-denominated bond yields for these firms have largely mirrored movements in U.S. 10-year Treasury yields (Figure 1). One key deviation occurred in March 2020, at the onset of the pandemic, when uncertainty and risk aversion caused emerging market yields to spike even as U.S. Treasury yields fell in response to the U.S. Federal Reserve’s rate cuts. However, this divergence proved short-lived, with emerging market yields swiftly falling back in line with U.S. Treasury yields—a stark contrast to the more prolonged disruptions experienced during previous emerging market crises, such as those originating in Latin America (1980s), Asia (1997), and the Russian Federation (1998), or the 2013 “taper tantrum,” during which spreads for emerging market corporate debt rose in response to a drop in global risk appetite. During the past five years, borrowing costs for emerging market firms have tracked global interest rates more closely than in more distant historical episodes.

U.S. dollar-denominated corporate bond yields in emerging markets at all income levels are higher today than pre-pandemic, but the rise was similar or less pronounced than in advanced economy comparators. On average, yields rose from 4.8 percent in December 2019 to 6.4 percent in September 2024. Although this is a significant increase, it is less prominent than for investment-grade companies in advanced economies, which on the eve of the pandemic were benefiting from exceptionally low interest rates, whereas emerging market corporations had been contending all along with perceptions of greater risks. For example, yields rose from 2.7 percent in December 2019 to 4.7 percent in September 2024, for U.S. investment grade companies. The percentage point increase was about the same or smaller for emerging market firms in all income groups, and smaller as a share of yields pre-pandemic (Figure 2). As expected, borrowing costs vary across income levels, with corporate borrowers in lower-middle income countries typically facing higher yields than their upper-middle income or high-income counterparts. Interestingly, in the lower-middle-income group, some corporate bonds were perceived as less risky than sovereign bonds, highlighting the nuanced risk perceptions of investors.

As interest rates on U.S. dollar denominated debt rose, there was a noticeable shift by emerging market companies toward borrowing in local currencies, especially in countries with relatively deep domestic capital markets. India, in particular, saw a pronounced shift toward local-currency bond issuance (Figure 3). Borrowing in local currencies offers several advantages, including lower exposure to exchange-rate fluctuations and currency mismatches, which create vulnerabilities especially in periods of global financial volatility or high and volatile inflation. Although nominal interest rates also increased on domestic currency instruments, many corporate borrowers found them preferable to incurring the risk of depreciation or costly hedging, on top of rising foreign currency rates. However, not all firms had the option to shift toward domestic currency borrowing. In many lower-income and smaller countries with less developed capital markets, companies remain dependent on foreign currency denominated debt.

Emerging Market Corporates Show Resilience

Despite the rise in interest payments, emerging market firms have managed to maintain relatively healthy financial positions, as reflected in their interest coverage ratios (measured as earnings before interest and taxes, divided by interest payments). Analysis of the balance sheets and income statements of publicly traded companies in emerging markets shows that although interest payments as a share of total debt have increased since 2021, profits have comfortably kept pace (Figure 4). As a result, interest rate coverage ratios are currently similar to pre-pandemic levels. In lower-middle-income countries, where the impact of higher interest rates has been most pronounced, interest payment ratios rose from 6.5 percent of total debt in 2021 to 10 percent in 2024. Nevertheless, after peaking in 2021-22, interest coverage ratios have returned to levels comparable to those seen before the pandemic (Figure 5).

Although emerging market corporate borrowers maintain relatively healthy balance sheets, several factors point to potential future vulnerabilities. First, global interest rates are projected to remain above pre-pandemic levels in the coming years, increasing the cost of refinancing debt incurred prior to 2022. Second, corporate leverage is higher today than a decade ago in most emerging markets, especially in high-income emerging economies and lower-middle income countries (Figure 6), and corporate debt as a share of GDP has risen over the past two decades. These developments tend to make both companies and emerging economies more sensitive to shifts in global financial conditions. Third, higher interest payments might ultimately erode firms’ ability to invest.

Considering how emerging market corporate borrowers have withstood major shifts in global interest rates, there are grounds for optimism. Beyond the cost of borrowing and related vulnerabilities, however, corporate resilience will hinge on profitability, which in turn will be heavily influenced by global, regional, sectoral, and country-specific shocks against a backdrop of high global uncertainty.