Are we on the cusp of an emerging market debt crisis?

Are we on the cusp of an emerging market debt crisis?

In November, the Institute of International Finance (IIF) released startling figures: The global level of debt rose by $ 15 trillion due to the cost the pandemic had inflicted on the global economy. The IIR expects global debt to exceed $ 277 trillion by 2020, or 365% of global gross domestic product (GDP). The 320% of global GDP it represented in 2019 was already a mountain of debt.

The situation looks particularly grim for emerging markets, where the debt-to-GDP ratio will reach 250% this year. While this may seem below global standards, many of these countries do not have the financial means to support this debt, as an ever-increasing share of their national budgets and revenues must be spent on servicing this debt.

The pandemic has wreaked havoc on economies around the world. Developed markets have responded with massive, multibillion-dollar stimulus packages. Unlike the 2008 financial crisis, when these packages spread to middle and low income countries, it happened to a lesser extent this time around. In 2008, the International Monetary Fund (IMF) issued $ 270 billion in new Special Drawing Rights (SDRs), essentially doubling the organization’s firepower. Most IMF shareholders wanted to raise SDRs by $ 500 billion this year but were blocked by opposition from US President Donald Trump. (The United States is the IMF’s largest shareholder.)

With SDRs becoming a transmission mechanism and developing economies hit hard by the pandemic, the G20 supported the IMF and the World Bank with a Debt Service Suspension Initiative (DSSI), where 73 countries qualified for have their debt – interest as well as principal – suspended until June 2021. Forty-six countries have so far resorted to the DSSI, which has saved them $ 5 billion in expenses. While this has been helpful, these countries still have not been canceled and still owe both principal and interest overdue. That being said, the IMF has lent $ 102 billion to the poorest countries, and the World Bank and other development banks have followed suit with $ 160 billion and $ 80 billion, respectively.

DSSI encourages bilateral creditors to join efforts to suspend debt, which many of them have done. He also encourages lenders in the private sector, which has so far failed to resonate. This is particularly important as Chinese “strategic banks” are classified as private sector institutions by their government. They have made large loans to Africa, Central Asia and Latin America, securing China’s access to natural resources and funding the country’s Belt and Road Initiative.

Global debt levels increased by $ 15 trillion due to the cost the pandemic inflicted on the global economy.

Cornelia Meyer

IMF Managing Director Kristalina Georgieva warned earlier this year that half of the poorest countries were on the brink of debt distress. In fact, in December, six countries had defaulted or requested debt restructuring. Expect that number to increase in 2021.

What makes the situation even more precarious is that middle-income countries are also plagued by debt problems, where debt as measured by GDP has increased by 30 percentage points in the first nine months of year only. Of particular concern are South Africa and Brazil as, in addition to being classified as middle-income countries, they are also members of the G20.

No wonder, then, that concerns about a looming debt crisis in middle- and low-income countries are on the rise. Vera Songwe, United Nations Under-Secretary-General and Head of the United Nations Commission for Africa, is right when she said that the continent will need $ 100 billion over the next three years and that these funds should be given in the form of grants rather than loans. in order to avoid a wave of faults.

Why is this important for the Gulf Cooperation Council (GCC) countries and for the world in general? The GCC is part of the Middle East and is a close neighbor to Africa, the Indian subcontinent and Central Asia, where several of the countries on the brink of a debt crisis are located. As the saying goes, it’s hard to maintain a good home in a struggling neighborhood.

In addition, GCC economies and their banks are interconnected with the global financial system. A litany of emerging market debt crises spanning from Latin America in the 1980s to Asia in the 1990s and beyond have taught us that systemic debt challenges in emerging markets can spill over into the global financial system via banks, fixed income instruments and secured loan obligations, which could potentially lead to the next shock to the financial system. In other words: watch this space!

Disclaimer: The opinions expressed by the authors of this section are their own and do not necessarily reflect the views of Arab News