Country: Global / Non-Specific
The flow of credit is essential to economic growth, development, and vibrant financial markets. And while all economies experience periods of financial instability, many emerging economies lack the tools to adjust, leaving them more vulnerable to boom and bust cycles, with negative consequences for households and businesses. Non-performing loans are a natural consequence of expanded credit, but without the means to effectively resolve them, economies will falter.
Every financial system has faced or will face a crisis at some point. But even in the absence of a crisis, the extraordinary growth in credit over the last two decades has resulted in an increase of non-performing loans (NPLs), which are an unavoidable by-product of lending. This can put economies at risk. When not addressed, distressed assets can grow to reach critical thresholds that can slow down, or even prevent, economic recovery and increase unemployment, creating a vicious circle that is difficult to break. Well-developed distressed assets markets can interrupt this loop, allowing for a return to economic growth and financial stability. However, this requires that all stakeholders—each inevitably with different motivations—are prepared to reach compromises. Similarly, the magnitude of the NPL problem is so severe in many economies that collaboration between the private and public sectors is also crucial. In response to these challenges, the International Finance Corporation (IFC) is taking the lead in supporting the development of strong distressed assets markets across emerging economies through its Distressed Asset Recovery Program (DARP) and capitalizing on the attractive investment opportunities deriving from these challenges.
This report is structured in four chapters. Chapter 1 provides an overview of DARP, how DARP addresses market inefficiencies today, and what DARP will focus on going forward. Chapter 2 examines the importance of having a robust legal framework that enables the development of distressed assets markets, while Chapter 3 explores how the establishment of public asset management companies (AMCs) can complement the crucial private sector involvement. Finally, Chapter 4 looks more closely at several markets where most preconditions for large-scale distressed assets resolution are being put in place. These warrant a closer look by investors seeking opportunities in distressed assets markets.
Updated: March 7, 2022