Polina Kurdyavko, Head of EM Debt, reflects from the window seat while travelling around South America.
There is something truly special about travelling in a window seat. A few weeks ago, on a tour of South America – visiting Brazil, Argentina, and Colombia following the IMF annual meetings in Washington D.C. – I found myself gazing out of the aeroplane window, contemplating the vast landscapes below. Such moments provide, literally, a bird’s-eye view and offer time for reflection on both the challenges and opportunities facing these countries. As investors, maintaining perspective is key, and a reminder that the policies we advocate can also have significant side effects once implemented.
What was our wishlist?
1. The shift towards monetary orthodoxy: looking back over the past 25 years, one of the biggest changes in emerging markets has been the widespread adoption of monetary policy orthodoxy, which has enabled countries to have more influence on local inflation dynamics while also developing deep and sophisticated domestic markets. This shift has significantly reduced reliance on external debt, with over 90% of all emerging market debt now issued locally, thereby mitigating vulnerability to external financing shocks. However, even well-intentioned policies can have unintended consequences.
Consider Brazil as a case in point. In response to significant service inflation, driven by what central bank president, Galipolo, describes as the most robust labour market in 30 years, the bank has increased interest rates by 425bps over the past year, resulting in a policy rate of 15%. This measure has been effective in curbing inflation that has been exacerbated by employment dynamics and fiscal policies.
However, it has also rendered corporate borrowing substantially more costly. In other words, Brazilian companies with a leverage level of over 3x now spend 60% of their EBITDA on servicing their interest bills. Even some of the companies that I met in Sao Paulo, with an investment grade rating that relied on the domestic funding market, saw their leverage and interest bills almost double over the last year. This unsustainable position has resulted in a high level of defaults in the local market.
According to Bloomberg analyst Gabriel Gusan, 31% of all companies in Brazil (including micro-enterprises) were behind on their loan payments as of June 2025. Across the world, Turkey has also joined Brazil in this double-digit rate environment after hiking rates, from 8.5% in June 2023 to 50% in March 2024. Despite rates cuts this year, with the policy rate at 39.5%, Turkish corporates are still feeling the strain, though many rely more on external rather than domestic funding.
Looking ahead to 2026, we expect corporate defaults to rise, particularly in some portions of the Brazilian market, where paying the price for orthodox monetary policy has crippled balance sheets, especially in the sectors that also experienced demand slowdown and margin pressure. The silver lining is that most Brazilian corporates have weathered many crises over the past two decades, which has fostered resilience.
Although default statistics are likely to show an increase, the overall asset quality of Brazilian companies remains strong, presenting opportunities for positive performance for discerning investors. Moreover, we favour opportunities in the local market in Brazil, given attractive real rates and continuous policy orthodoxy.
