Emerging Market Corporate Debt Faces Rising Risks in Brazil, Turkey

Mounting financial troubles at companies in Brazil and Turkey are signaling potential cracks in the previously strong performance of emerging market corporate debt, raising concerns about a possible slowdown in the sector.

In Brazil, chemical giant Braskem SA is bracing for a potential debt restructuring, while waste-management firm Ambipar Participacoes e Empreendimentos SA is nearing bankruptcy. Simultaneously, a government probe into Turkish industrial conglomerate Ciner Group has sent bonds of its subsidiary, WE Soda Ltd., plummeting. These developments risk reversing nearly two years of outperformance for developing-world company debt against global peers, a trend that has seen investors seek alternatives to U.S. markets amid concerns over domestic policies.

“These are surprising events that are deeply problematic,” said Akbar Causer, head of emerging-market corporate debt at Morgan Stanley’s asset-management arm. “If this continues or things get a little bit worse, I’m scared it might shake some of the confidence. And then you might see some contagion.” Investors are already reacting, with some taking profits in recent gains, and a shift toward safer, higher-quality companies, as detailed in recent Barings research. Raízen SA, a highly leveraged Brazilian company, saw its bonds slump 20 cents in two days, and Brazil’s corporate bonds have lagged peers over the past two weeks, delivering an average loss of 5.3%.

Turkey and Argentina are also experiencing difficulties, with Argentina’s corporate defaults reaching levels not seen since the pandemic following currency reforms implemented by President Javier Milei. High borrowing costs and ongoing inflation in Turkey, coupled with a fraud probe involving Can Holding and Ciner Group, are further exacerbating the situation. The current challenges highlight the increased risk associated with emerging market investments, a sector that had seen significant inflows of over $52 billion through October 8, according to data from EPFR compiled by Bank of America Corp. You can learn more about emerging markets from the International Monetary Fund.

Officials are monitoring economic data releases from Argentina, China, India, and Nigeria, as well as activity data from Brazil and Peru, for further indications of economic health and potential impacts on the debt market.