Many emerging nations are being thrown into a “silent debt crisis” by high interest rates in the U.S., the World Bank has warned.
Poorer countries piled up debt during the COVID War to pay health care costs and to keep their economies afloat. Much of that debt was incurred in dollar-denominated loans with short terms or variable interest rates. As U.S. interest rates increased, so did the size of the interest payments those countries owe.
Those higher rates have created a “nightmare” for low-income countries with large foreign debt, Ayhan Kose, the bank’s deputy chief economist, said in a Financial Times interview.
“Given the well-defined challenges these economies are facing with respect to [refinancing] debt obligations, there is a silent debt crisis taking place,” he added.
Bonds issued by those nations sold off last year as the U.S. Federal Reserve ratcheted up interest rates, strengthening the dollar and luring money away from riskier investments.
The higher rates have left poorer nations paying more to service their dollar-denominated debt. Some now are paying as much as 23 percent interest on those debts, the FT reported, compared to 5 percent in 2019.
Riskier investments always pay a “risk premium,” an additional amount of interest to convince investors to take a chance. The current risk premium for many of those countries is as much as 10 percentage points above that in the U.S.
A gap of 10 percentage points between U.S. treasury securities and a corporate bond’s yield puts that bond into the “junk” category.
Now interest payments as a share of GDP for many countries are higher than at any time since 2010, according to the FT.
As a result, the gross government debt load for low- and middle-income nations is on trend to reach 78 percent of GDP by 2028, compared to 53 percent in 2018, the International Monetary Fund said.
Emerging nations have issued about $360 billion in foreign currency debt so far this year, data service Dealogic reported. In 2022, the total was $380 billion. In each of 2020 and 2021, those countries borrowed between $700 billion and $800 billion.
Already, some countries have been unable to pay off debts or to refinance them, pushing Ghana and Sri Lanka into default and leaving many others perilously close to it. Egypt and Kenya have hefty foreign debt maturing in 2024 and prospects for refinancing are daunting, the FT noted.
Several weak economies “have been priced out of the dollar bond market,” senior fellow Brad Setser at the Council on Foreign Relations said to the FT. “Only the stronger emerging markets can afford to borrow in dollars,” the currency most often required to pay bills in foreign trade for oil and food.
Even if inflation is falling in poorer countries, high U.S. interest rates force those nations to keep their own interest rates higher. Cutting their own rates could weaken their currencies, fueling domestic inflation because imports would be more expensive.
“It’s a textbook environment for investors to hunker down, move capital toward the U.S., and de-risk in emerging markets and other asset classes,” Paul Greer, Fidelity International’s emerging market debt fund manager, said to the FT.
TREND FORECAST: As they always do, emerging nations will turn to international agencies such as the International Monetary Fund for bridge loans and to restructure debt. Such agencies are funded by the U.S. and other nations, which now are grappling with their own debt burdens and have less financial ability or political will to write blank checks to poor countries.
In the recent past, China has been emerging as a lender of last resort, using its cash wealth to win friends and economic allies. However, China is now in the throes of its own financial crisis, including a national debt that exceeds the size of its GDP, which we noted in “China’s Not-So-Little Secret: Government Debt Exceeds GDP” (18 Apr 2023).
Therefore, China also will not be jumping into the financial hole left by reluctant Western lenders.
As a result, lenders will incur losses as they are forced to restructure nations’ debts to levels poor countries can afford. The alternative would be to write off the entire amount.
However, there are limits to how far lenders can stretch. A growing number of countries will default on their foreign debt.
The result will be the same in countries that default or that accept harsh terms to restructure their debt.
As we warned in “Emerging Nations Fall Deeper Into Debt” (28 Feb 2023), those nations are more likely to fall prey to social unrest, radical political movements, and populist or socialist governments, especially as high food prices and rising interest rates pummel households.
As Gerald Celente often says, “When people lose everything and have nothing left to lose, they lose it.” Because we forecast a steep economic decline, our Top Trend for 2021, “New World Disorder”, will escalate as people take to the streets to protest lack of basic living standards, government corruption, crime, and violence.
It will also escalate the refugee trend which in turn will also support anti-immigration, anti-establishment populist movements in nations where refugees seek safe havens.