Emerging-market companies are starting to look safer than their governments

A quiet shift is underway in emerging-market debt. A growing number of corporates are now borrowing in global markets at cheaper rates than their own governments, Bloomberg reports. For investors, that’s a sign that sovereign risk — long the defining constraint on EM credit — is becoming less of a drag for stronger, globally oriented companies.

EM corporates have sold USD-denominated bonds this year at an average yield of around 5.8%, undercutting the roughly 6% investors are demanding from sovereigns with comparable maturities, based on data through early February. This marks a clear reversal from the past two years, when companies paid 7% or more to borrow — above government funding costs — reflecting the long-held assumption that corporations in developing economies are inseparable from sovereign risk.

In some cases, the gap is striking. Ukrainian agribusiness MHP SE has recently raised debt at yields 6.5 percentage points below those on Ukrainian government bonds, even though the country is at war and defaulted in 2022. Investors backed the company because it continued paying its bondholders throughout the crisis — something the government was unable to do.

Why the old rules are bending

In developed markets, it is common for large multinationals to enjoy higher credit ratings and lower borrowing costs than their governments. In EMs, that separation has historically been constrained by the sovereign ceiling — a ratings convention that caps corporate creditworthiness at or below that of the home country. The rationale is that governments control regulation, capital flows, and currency regimes, all of which can overwhelm even healthy corporate balance sheets.

Research from Aberdeen Investments suggests the ceiling is becoming less binding for a subset of issuers, even as many companies still operate close to — or within — the sovereign ceiling. Firms with diversified operations, hard-currency revenues, and conservative leverage are increasingly insulated from domestic fiscal and political stress. In practice, markets are starting to price these firms on fundamentals rather than passports.

Export-focused firms stand out: When local currencies weaken, governments tend to suffer, but exporters often benefit because their costs are domestic while their revenues are in USD. Companies can also respond more quickly to stress by cutting spending or delaying investment, while governments are constrained by politics and social pressures.

Markets are rewarding stronger corporates

So far in 2026, EM corporate debt has slightly outperformed sovereign bonds, with spreads falling below 200 basis points — near their lowest levels since the 2008 global financial crisis — while returns have edged ahead of government-debt indexes. “For those seeking lower volatility investments, emerging-market investment-grade corporates and sovereigns present an appealing spread advantage over US investment-grade corporates,” UBS Asset Management’s Shamaila Khan said.

In its 2026 outlook for EM hard-currency debt, Janus Henderson argues that investors are becoming more selective rather than broadly risk-averse. Instead of trading EMs as a single macro wager, markets are increasingly differentiating between sovereign balance-sheet risk and corporate credit quality — particularly for issuers with strong cashflow visibility and manageable leverage.

The shift is also reflected in the data. EM corporate USD bond yields have held below 6%, down sharply from late-2022 levels, underscoring how far risk premiums have compressed as investors grow more willing to price corporate credit separately from sovereign balance sheets. With elections looming across parts of Latin America and Asia — and fiscal discipline under pressure — some investors see room for corporates to continue outperforming, even as sovereign risk remains a constraint.

Not a full break from sovereign risk — yet

This does not mean EM companies are suddenly immune. The sovereign ceiling still matters, particularly for domestically focused companies exposed to regulation, subsidies, or capital controls. During periods of global stress, sovereign risk tends to reassert itself quickly, pulling corporate spreads wider regardless of fundamentals.

Still, the signs are growing: In parts of the EM universe, investors are beginning to distinguish strong companies from weak states. For those seeking yield without taking on full sovereign risk, the separation is becoming increasingly attractive.

MARKETS THIS MORNING-

It’s another morning with Asia-Pacific markets opening in the green, led by the Nikkei’s rally, as investors react to Japanese Prime Minister Sanae Takaichi’s election victory. US markets, on the other hand, are cooling off, with indices set to open in the red after two days of gains.

THE CLOSING BELL-

The EGX30 rose 0.5% at yesterday’s close on turnover of EGP 8.1 bn (38.9% above the 90-day average). Local investors were the sole net buyers. The index is up 20.2% YTD.

In the green: Misr Cement (+5.2%), GB Corp (+4.9%), and Eastern Company (+2.7%).

In the red: Juhayna (-3.3%), EFG Holding (-2.6%), and Edita (-1.9%).