‘Why Emerging Markets Debt Crisis Is a Global Concern’

Slowing global growth, surging inflation and rising interest rates are squeezing emerging economies harder than most. For instance, the bond-market bloodbath isn’t over yet, and the International Monetary Fund (IMF) recently issued an ominous warning over rapidly-slowing global growth and the rising threat of an emerging-markets debt crisis.

The fear is that the global slowdown, combined with surging inflation and rising interest rates, is likely to hit poorer and highly indebted countries especially hard by causing a slump in inward investment and driving down their currencies.

Emerging markets already facing debt distress would then be vulnerable to broader economic and social crises – compounded by emergency fiscal retrenchments – entailing the kind of food and power shortages, social unrest and political meltdown now being seen across different emerging markets.

In fact, the dramatic loosening of monetary policy by the US Federal Reserve and other big central banks supported risk appetite globally and kept capital markets open to emerging-market borrowers. Also, massive fiscal stimulus by policymakers helped generate a surge in global trade.

Even before the Ukraine war introduced new threats to the global economy, the combination of tighter US monetary policy and a sharp decline in global trade growth was starting to hamper the ability of lower-income countries to get hold of dollars.

The war in Europe has hit emerging markets with a “triple whammy”, says The Economist. The first blow is the potential for a short-term drying up of liquidity – and a broader “flight to safety” that raises the cost of borrowing across emerging markets and increases the burden of debt.

The second is the broader macroeconomic picture of lower growth and food and energy price shocks. The third is the likelihood of a long-term change in willingness to lend to high-risk sovereigns.

According to the Washington DC-based Institute of International Finance, emerging-market bonds and loans maturing by the end of next year total around $9trillion. Compared with the emerging-markets debt crises of the 1990s, far more debt is denominated in local currency and fewer exchange rates are pegged rigidly to the dollar, cutting the risk.

Meanwhile, what makes the situation “particularly worrying”, says Simon Nixon in The Times, is “the lack of any tested mechanism for restructuring sovereign debt”. That’s bound to be needed (and has already been requested by Chad, Ethiopia and Zambia) as conditions deteriorate and the pressure on governments grows. The whole question is complicated by big changes in who’s doing the lending.

Today, the Paris Club of rich creditor countries accounts for about 11oper cent of external emerging-market debt, compared with 28 per cent in 2006. China’s share has jumped from two per cent to 18 per cent, and the share sold to private investors has risen from 3per cent to 11 per cent. All that makes restructuring debt “a far more complex business”.

From March 2020 until December 2021, the G20’s “debt service suspension initiative” suspended a total of $10.3bn, whereas, in the first year of the pandemic alone, low-income countries accumulated a debt burden totalling $860bn, according to the World Bank figures.

The reason this matters so much, says Nixon, is that a debt crisis in emerging markets could readily widen – in the same way, the eurozone crisis did – into a broader banking, financial and economic crisis.