EM Sovereign External Repayment Risks: Staying alive after 2025
The desk interprets J.P. Morgan's latest analysis on emerging market (EM) sovereign external repayment risks as a crucial indicator of stability through 2026. Per the full note, while 18 sovereigns are flagged as vulnerable, the majority have adequate reserves to manage Eurobond amortizations, suggesting a mitigated risk of immediate credit events. This outlook is particularly relevant as it contrasts with previous fears of widespread defaults in the EM space. The consensus target for the currency pair reflects a cautious optimism, with no significant calendar events expected to disrupt this narrative in the near term.
What the desk is arguing
J.P. Morgan's EM sovereign credit team argues that despite elevated vulnerability in a subset of EM and frontier sovereigns, the majority possess sufficient reserves and financing sources to cover upcoming Eurobond amortizations through 2026. The analysis updates their previous work and identifies 18 sovereigns flagged by their risk metric as most prone to credit events.
The team finds that while many familiar names (e.g., Argentina, Pakistan) remain stressed, the near-term refinancing outlook is manageable due to existing buffers. However, beyond 2025, the repayment profile steepens, raising the stakes for fiscal and policy adjustments.
Implicitly, the desk rejects the notion that a wave of EM defaults is imminent. Their reserves adequacy argument suggests that market pricing of distress may be overdone for the 2025-2026 horizon, even as longer-dated risks persist.
01Most at-risk EM sovereigns have sufficient reserves to meet Eurobond repayments through 2026, reducing near-term default risk.
02The set of vulnerable sovereigns includes 18 names, some new to the list, signaling broadening credit stress.
03Beyond 2025, the repayment burden increases, requiring sustained policy effort and market access to avoid distress.
Market implications
The analysis suggests limited near-term credit event risk for EM sovereigns, which could support demand for short-dated EM bonds and compress spreads for the most liquid names. However, the 2026+ cliff may keep longer-dated paper under pressure. Reserve adequacy metrics become a key differentiator, rewarding countries with stronger external positions.
Risks to this view
The main risk is that reserves and financing sources prove insufficient if global risk appetite deteriorates or commodity prices turn adverse. Additionally, the analysis may underestimate political risk or contingent liabilities (e.g., state-owned enterprise debt). The inclusion of new vulnerable names suggests stress could be more systemic than previously thought.
Hello, and welcome to our At Any Rate Emerging Markets Focus podcast, a place for us to discuss recent developments and key issues of focus in the emerging market fixed income asset class. I'm Johnny Goulden, Head of EM Fixed Income Strategy here at J.P. Morgan, and today we'll be doing a special edition covering a topic recently covered by our EM Sovereign Credit Team, EM Sovereign External Repayment Risks, and joining me for that discussion today are Ben Ramsey, who is Head of EM Sovereign Credit Strategy here at J.P.
Morgan, and Nishant Poojari, who's one of our EM Sovereign Credit Strategists as well. So Ben, Nishant, thank you for being here. Thanks, Johnny.
Great to be here. Pleasure to join you, Eddie. Thanks.
Great. So this report really continues some of the work that we had been doing, trying to give a comprehensive assessment of the external repayment risks across a broad set of EM and sovereign – EM sovereign and frontier markets. So essentially, are these countries in a position and what are the risks around them being able to pay back their debt?
The last version was actually about two years ago in 2023. That was published during really a wave of sovereign defaults resulting from the economic financial market pressure from both the pandemic and also a Fed hiking cycle, which was also exacerbated, obviously, by Russia's invasion of Ukraine. Now in 2025, this latest assessment, the world has changed and probably greatly improved to that extent.
But obviously, there are still risks that we need to be assessing around can countries pay back their debt and really trying to dig into that. So this is really an important topic and this deep dive analysis is obviously a really key contribution to that discussion. So Ben, let's really start with you and just try and deal with what do you think the main takeaways are from the analysis that you've done and perhaps for some context, how would you compare those to the conclusions we had two years ago in 2023?
Yeah, sure, Jonny. Thanks very much. So as you mentioned, back in 2023, conditions were more adverse.
We had seen improvement in terms of the really acute market conditions of the prior year, but we were still facing a lot of uncertainty. Even so, we flagged within the framework that will explain a number of sovereigns as vulnerable, not to be not a surprise, but we concluded that defaults were unlikely over the forecast horizon that we had then and even under basically assumptions of some financing stress and limited market access. So I think what's notable in 2025 is not only were we right, I mean countries largely avoided defaults and we did have Ethiopia, but that was already sort of previewed by their participation in the common framework.
But as mentioned, I think the better external tone has really helped a number of countries strengthen their buffers and the macro fundamentals have improved beyond what our expectations were at the time. And of course, market conditions are also easier than what we might have been anticipating in terms of our conservative assumptions. So this year, our approach builds on that framework.
Of course, we have updated data and we've introduced a little bit more granular country-specific lens in terms of how we're looking at some of the countries. The majority of the at-risk sovereigns that we're looking at do possess sufficient reserves and financing sources in our estimation to meet upcoming amortizations through 2026. So that's our sort of key conclusion.
There are exceptions we have to look at and those are really focused on Maldives and Bolivia. They do face near-term challenges in terms of Eurobond amortizations and they do have some pretty acute liquidity stresses, but those amortizations are manageable if we think about them in overall absolute terms and there is a potential for either bilateral or multilateral support that could reduce the risk of a credit event in those cases. So again, the key conclusion is that while we do have medium-term risks, there's still a lot of uncertainty in the world even though conditions I think have improved.
We have a much better starting point in terms of overall conditions. We're not identifying any new sovereign defaults beyond those two risk cases that I mentioned that I do think we have to keep a close eye on and I think that's the main takeaway. We still think the coast is clear and we're in a better position than we would have been two years ago.
That all said, the top-down outlook can be tenuous. Market confidence can shift quite quickly, especially from very stretched levels of spreads right now. So we do think that a rigorous monitoring remains warranted and that at the end of the day is the purpose of this report.
Maybe let's go a little bit into that rigorous monitoring as you call it and talk a bit about methodology here. So how do you approach the fundamentals and the variables that you use to screen these risky countries? How do you think about coming up with what their external financing needs are, which is sort of a key part of what this is, and how does that feed into what you call the reserve burn, which we use to flag where countries may have more difficulty meeting their payment needs?
Sure. Thanks. I think that's a good starting point.
As mentioned, EM Sovereigns have outperformed the expectations that we had a couple of years ago. That's largely a result of better current account balances, a key component obviously of external financing needs. That's largely due to better export performance.
That's been underpinned by, I think, pretty favorable commodity prices. But we've also seen FDI and portfolio inflows exceed the conservative forecast that we set forward, particularly those countries like Egypt, Nigeria, El Salvador. All of those also have important reform efforts, which I think shouldn't be left aside in terms of the conversation.
Again, that's all led to sort of a stronger FX reserve position and reduced external financing gap. So from where we are now, how do we identify the set of at-risk sovereigns that we've analyzed in this report? That framework is consistent from the past reports and the past efforts that we've done here.
We have a comprehensive set of indicators in which we aggregate debt stock, flow indicators, short-term debt burden, the weight of Eurobond cash flows on overall cash flows, and reserve coverage. Here, we basically look at the whole range of the outcomes from aggregating these figures and we basically take the set which fall on the most vulnerable part of the spectrum when we compare across EMs and frontiers. To be sure, a lot of EMs do flag as at least medium risk, but the overall trajectory for the set has been positive.
So with these aggregated indicators, we come up with our set of countries. We have 18 countries which we look at in this report. And then we put them through effectively a stress test, which is a reserve burn exercise, as you mentioned.
Here, we start with looking at gross external financing needs in terms of the short-term horizon this year. Next year, we work closely with our own economists' forecasts and certainly our economists and the EM Edge Group have been playing a close collaborative role with us on those. For the more medium-term horizon, we basically root ourselves in IMF forecasts and then we basically have a set of gross external financing needs outlook and then we want to basically apply a pretty conservative set of and generally blanket set of assumptions in terms of the financing sources that we'll be looking to fill those needs.
And with those, in terms of any financing gap which persists, we basically see the countries have to use that stock of reserves, they have to lean into their buffers in order to cover their financing gaps. So again, projecting this, the main assumptions have to do with limited market access. We have sort of a stable FDI assumption in terms of the rollover rates for multilateral and bilateral debt.
That's basically we assume that that's all rolled over but in terms of other private obligations, we only assume an 85% rollover rate and then we assume no Euro bond issuance going forward, basically to say what happens if these countries are shut out of markets. And again, how does then any residual financing gaps get filled? For countries where the IMF is projecting current account surpluses into the forecast horizon where basically that limits or actually it can have sort of a financing gap which is a positive one and you would have reserves building over the forecast horizon if they sort of comply with their IMF programs and their IMF targets, here we're thinking about countries like Angola, Ecuador and Zambia where the projection based on the IMF shows reserves going up.
We do show alternative scenarios with balanced current accounts rather than current account surpluses just to kind of highlight the sensitivity. So the other thing we have to be careful about because we're basically using a gross reserve calculation in terms of this burn is to be careful where gross reserves are not really representative of the real external liquidity positions that countries have. So here, Argentina is kind of case in point.
Reserves are largely encumbered. So we have to make a big caveat here about what reserve burn means in our scenario. In a country like Bolivia where reserves are largely gold and also maybe somewhat encumbered and then there are also countries like Senegal, Gabon, Cameroon where there are pooled sources of reserves.
So we just have to be careful about that since again, the main stress test is based on how quickly reserves may be depleted. At the end of the day, what we basically look at is this projection for how quickly reserves may go down and how does that compare with the forecast of Eurobond debt service and amortizations and coupons on a year to year basis and at what point will reserves potentially be below the amount that they have to pay in terms of Eurobond debt service. That would be basically us flagging that that payment is clearly at risk.
Great. Thanks for that, Ben. And Nishan, let's bring you in here and talk a bit about what markets are pricing.
What do we see at the moment in terms of how sovereign credit risk is looking? What is that telling us about the implied default probability at the moment? And maybe if you could also touch about how is it that these high risk countries have managed to access external bond markets in order to meet their needs at the moment?
Sure. So, well, market pricing has been much more benign over the past year or so. Spreads have come not only compressed, but this ease of the single issue has also dropped below 10% threshold that we have been using for the market access barrier.
But that being said, for most of the sovereign distressed names like Maldives in Bolivia, markets still price elevated risk premiums. What our analysis shows is for this at risk countries, market are pricing currently a default risk of around 17% for the near term and around 40% over the five year period. This is much lower than what we had in 2022 when spreads were much higher.
But it is still above the historical averages. But moving to the question of market access, many of these high risk countries that were shut out of markets during the high spread, high yield period of 2022 and 2023 have now regained external market access. So over the past year and more recently, we have seen substantial issuance from countries like Angola, Nigeria, Kenya and El Salvador.
What this has done is that it has not only helped the sovereigns meet their near term amortizations, but it has also replenished their reserves. So while market sentiment has been optimistic, which has been helpful for these countries, the ability to tap those external markets has been a key factor in reducing the near term repayment risk for these countries. Great, thank you for that.
So let's dig down a bit here then, Ben, let's come back to you and start talking about some of the country highlights that we have. Can you start with Latin American countries and maybe run through those? Sure, Johnny.
So let's start with Argentina, which has been topical. We've been talking about that on this podcast, it seems almost every week. But in terms of how we see this in our framework, as I mentioned, reserves have been really replenished in large part from the IMF program, which came in April.
But we have to put some caveats around those reserves given how encumbered they are and basically there's a need for Argentina to recover market access over the next year or so in order to meet debt maturities, that was sort of our working assumption. Given the stress that we've seen around the midterm election cycle, Argentina basically fell into sort of a negative expectation spiral and received very strong pledge of support from the US Treasury. So we now kind of have this backstop.
We have to see as once we get through elections, which come in the next couple of weeks, how basically policy may shift, but effectively, we would expect them to retake the IMF program, the broad brushstrokes of the IMF program assumptions, which lead to reserve accumulation. If market access is not there, that sort of treasury backstop from the US may need to be called upon. In Bolivia, we also have elections.
Here it's presidential elections and it's really a critical juncture. It looks like we'll have a government coming from the right in power for the first time in a long time. But Bolivia's critically low reserves has had a fixed exchange rate for over a decade and we do have a Euro bond maturity around $300 million coming due in the first part of next year.
That payment size would be manageable as I've mentioned, but reserves in terms of the liquidity is a question and it will be a big question mark in terms of how the new government comes in, wants to deal with this issue of debt restructuring, whether they'll try to do something which would be more akin to a liability management operation and how the IMF plays a role there. So those are open question marks. Ecuador, here we've seen a country which really has had some of the most material improvements in the risk score metrics that we look at from the last time around to this time around.
We've had really some successful performance under the IMF program that they've had in terms of a lower fiscal deficit and we've seen gross external financing needs really improve with external accounts looking quite healthy in terms of current account surpluses. Then El Salvador has really benefited from higher than expected portfolio investment in FDI than what we would have been concerned about a few years ago and there we've seen that help to replenish reserves and El Salvador looks like it's in pretty good shape right now in terms of our repayment framework. Great, thank you.
Nisham, what about the rest of the world? I'll start with Asia first and then I'll move to Africa. On the Asia side, Maldives, as we have already discussed, looks like the most at-risk country over the near-term.
They have a repayment of 600 million due in April 2026 and with the reserve position that they have right now, it looks a bit tricky. But as we have seen recently and what we expect to happen when that repayment comes due is that the extraordinary bilateral support that they have received from its friendly countries will help to bridge that gap. So yes, reserves look insufficient, but probably that gap will be bridged.
On the other hand, you have Sri Lanka, which post restructuring seems to be on a better path or a stable and improving path. Their debt servicing needs are also much lower the next few years. Now moving to Africa, we have Senegal, which has been quite topical this year, seems to be a country with the concern that debt metrics have worsened given the hit-and-dead scenario.
Now what we await is the sustainability assessment from the IMF, which could be a very close call and the country faces a very weak fiscal and liquidity position. What has been on the improving side in Africa, you could name two countries, that's Nigeria and Kenya. For Nigeria, it is primarily an improvement in credit fundamental story, which was driven by reforms and the current account surplus.
But for Kenya, while risk scores have improved, particularly on the flow indicator side and Euro bond rate on cash flow side, what has helped them is the market access that they have received over the past two years, wherein they have issued to repay for the amortizations to the debt liability management exercise, as well as the bilateral financing that they have received, even without an IMF program. So these are the countries on the Africa side which has improved. Johnny, let me just say one more thing before we conclude, and I wanted to just put a special thanks here to my team members, Fariha Ahmed and Leonardo Thiago, who did an extraordinary amount of work.
This is a long and comprehensive report, as we mentioned at the beginning. So I just didn't want to conclude this podcast without recognizing their efforts in the report. Great.
Thank you for that. And maybe just both of you, before we close, final thoughts? Well, you know, aside from recognizing my team, we did a lot of work on this, you know, I think we're in a better position and I think that, you know, it's certainly worthwhile with spreads this tight to take stock of where we are and try to screen for where vulnerabilities may be.
And I think that we do need to look at, you know, everything can't rally the way it's been rallying. So we do need to really look at a country by country analysis. And really, that's the idea of what we're trying to do here for those countries which we do screen as more at risk.
I agree with Ben. Market pricing has been quite optimistic. But what we think is that investors should remain vigilant, especially for this most vulnerable sovereigns, even though where the market is right now.
Great. Well, that brings us to the end of this J.P. Morgan At Any Rate Emerging Market Focus podcast.
Thanks to you, Ben and Nishant, for joining today. And thank you all for listening. And we hope to have you back again with us for the next one.
This communication is provided for information purposes only. Please refer to J.P. Morgan research reports related to its content for more information, including important disclosures. 2025 J.P.
Morgan Chase & Company, a wise reserve. This episode was recorded on the 8th of October, 2025.