Analysis – As poor countries’ rise in default, deficits may take over By Reuters
Written by Libby George and Karin Strohecker
LONDON (Reuters) – The punishing post-COVID wave of sovereign defaults has finally subsided, as the likes of Ghana, Sri Lanka and Zambia end years of painful debt restructuring.
But the International Monetary Fund and others worry that dangerous deficits could take their toll on many emerging economies — holding back development, curbing climate change and fueling mistrust of Western governments and institutions.
This issue, and what should be done about it when western countries do not want to send money overseas, is an important issue at the IMF World Bank meeting held in Washington, DC this week.
“It’s a challenge in the sense that for many, debts have grown, borrowing has become more expensive, and external sources (are no longer reliable),” said Christian Libralato, portfolio manager of RBC BlueBay.
The US Treasury’s top economist has called for new ways to provide short-term financial support to low- and middle-income countries to end debt problems.
The Global Sovereign Debt Roundtable – which includes representatives from countries, private lenders, the World Bank and the G20 – has also tried to address this issue, and will be on the agenda when they meet in Washington on Wednesday.
But due to the budget constraints and the problems that exist in every room, Vera Songwe, the chairman of the Liquidity and Sustainability Facility – a group that aims to reduce the cost of debt in Africa – said that the current adjustment does not have the scale and speed needed.
“Countries avoid spending on education, health and infrastructure to pay their debts,” said Songwe. “Even in advanced economies…there are pressures on the system.”
QUESTION OF THE GREAT
Data from the non-profit advocacy group ONE Campaign shows that by 2022, 26 countries – including Angola, Brazil, Nigeria and Pakistan – paid more to service external debt than they received in new foreign currency.
Many first gained access to bond loans about a decade ago, meaning the big payouts came only because global interest rates were rising, making affordable money out of reach.
ONE estimates that the flow worsened in developing countries as a whole by 2023, estimates supported by experts at the Finance for Development Lab.
“The global financial safety net led by the IMF is no longer deep enough,” Ishak Diwan, director of research at the Finance for Development Lab told Reuters.
Diwan, who spent two decades at the World Bank, said that although official figures are not yet available, the negative transfers for 2023 and 2024 are likely to be worse. New funding from the IMF, World Bank and other international organizations has failed to offset rising costs, he said.
World Bank and IMF officials seem to agree. The World Bank aims to increase lending capacity by 30 billion dollars over 10 years. The IMF reduced additional payments, reducing the cost of overextended borrowers by $1.2 billion a year.
A STANDARD TURN?
Bankers say many countries are now able to repurchase markets, easing liquidity concerns.
“I don’t think there is a limit to access,” said Stefan Weiler, head of CEEMEA credit at JPMorgan. “The market is really open.”
Weiler expects bond issuance in Europe, the Middle East and Africa to reach a record $275-$300 billion this year – with several countries, Nigeria and Angola, likely to issue bonds next year.
But the cost is always high. Kenya, struggling to repay a maturing dollar bond, has borrowed more than 10%, a limit widely seen as unmanageable.
Finance minister John Mbadi said that Kenya will not be able to fund infrastructure investment through the budget.
“Kenyans keep complaining that ‘we don’t have money in our pockets.’ That in a sense means that we have challenges of lack of funds in the economy,” said Mbadi in a press conference.
China’s withdrawal from lending has also hit emerging markets hard, turning what has become a major source of income into a negative flow for those paying old debts.
NOW?
Development banks are already trying to work together to increase lending; The Inter-American Development Bank and the Africa Development Bank are in a global campaign to get countries to donate their reserves to the IMF, called “special drawing rights”, which they say can turn every $1 donated into $8 in loans. .
But the World Bank and others are still struggling to convince western countries to pay more to service the loan; Debt-ridden France plans to cut 1.3 billion euros in foreign aid, following cuts by the previous government in Britain.
A strong dollar means that key donor Japan will have to significantly increase its contributions to stay at the same level.
The mix is dangerous for developing countries.
“We see protests from Kenya to Nigeria to other places. It is a very dangerous situation,” said Diwan.
“We’re losing the entire south country right now.”
