The analysis cautions against taking gross foreign exchange reserves at face value. In countries like Argentina, reserves are heavily encumbered. For Bolivia, they consist mostly of gold. For others like Senegal or Gabon, reserves are pooled. These factors mean the headline number overstates the actual, readily available liquidity for debt servicing.
Contrary to a simple narrative of improved market sentiment, EM sovereign resilience stemmed from unexpectedly strong macro fundamentals. Better-than-forecast current account balances, export performance, FDI, and portfolio inflows were the primary drivers of stability, exceeding even conservative projections from two years prior.
For nations facing acute liquidity stress, such as Maldives with its large 2026 bond maturity, traditional economic analysis is insufficient. The key mitigating factor is the expectation of "extraordinary bilateral support" from allied nations. This geopolitical safety net is crucial for bridging financing gaps where reserves alone would fail.
Despite compressed spreads and improved market access, credit markets are not complacent. Pricing for the most vulnerable emerging market sovereigns still implies a significant 17% near-term and 40% five-year probability of default. This is well above historical averages, signaling lingering investor caution and skepticism about long-term stability.
The core of J.P. Morgan's repayment risk analysis is a "reserve burn" stress test. It conservatively assumes vulnerable countries are completely shut out of international bond markets. This forces a reliance on existing reserves and other financing, providing a stark measure of their true financial buffers and resilience against market shocks.