The G20 has emphasized the need for multilateral development banks (MDBs) to become “better, bigger, and more effective,” as outlined in its November 2024 reform plan. This roadmap includes 13 recommendations and 44 actions aimed at boosting development financing. A critical part of this strategy involves mobilizing private capital alongside MDB resources to meet ambitious goals, such as delivering $65 billion in climate finance by 2030 and expanding electricity access for 300 million Africans.
However, concerns about risk often deter private investment in emerging markets. While challenges like currency volatility, regulatory uncertainty, and contract enforcement persist, data from the Global Emerging Markets Risk Database (GEMs) Consortium—covering 18,000 projects worth over $500 billion—reveals that risks may be overstated.
Analysis by the International Finance Corporation (IFC) shows that private sector loans in emerging markets have an average default rate of 3.6%, comparable to non-investment-grade firms in advanced economies (e.g., 3.3% for S&P’s B-rated firms). Notably, default rates in emerging markets remained more stable during global crises, such as the 2008 financial meltdown, offering diversification benefits.
Sovereign credit ratings, often used to gauge private sector risk, may also paint an overly pessimistic picture. In lower-income countries, private borrower default rates average *6%—far below the *14% implied by sovereign ratings. Recovery rates further defy expectations: investors recover 72% of defaulted loans in emerging markets, outperforming advanced economy bonds and loans.
Development finance institutions like the IFC play a key role in mitigating risks through advisory support and structured financing. With MDBs scaling up private capital mobilization, the G20’s vision of leveraging private investment for development appears increasingly attainable. The data suggests that emerging markets, while not risk-free, offer resilience and recovery potential that investors often overlook.
