EM credit defaults likely to rise in 2016

Corporate leverage has increased considerably in several EM countries, especially US dollar-denominated credit. IMF data shows that EM corporate debt has risen from less than 50% of GDP in 2008 to almost 75% now.

The US dollar has continued to rally over the past 12 months, especially against EM currencies. Rising exchange rate has made debt repayment and servicing more expensive. With earnings facing strong domestic and external headwinds, there is more possibilities for defaults by corporates.

"Rising NPLs could impact EM banks, particularly in China, where NPLs remain below 2%. Our EM strategists expect EM corporate debt to underperform in 2016," notes Societe Generale in a report.