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The number of emerging nations with troubled sovereign bonds has doubled in the first half of this year to include 19 nations that are home to 900 million people, with El Salvador, Egypt, Ghana, Pakistan, and Tunisia especially vulnerable, Bloomberg reported.
The value of the distressed debt has reached $237 billion, about 17 percent of the $1.4 trillion emerging-market nations owe that must be repaid in dollars, euros or yen, according to Bloomberg data.
Bonds issued by 25 percent of the nations monitored by the Bloomberg EM USD Aggregate Sovereign Index are trading in distress, defined as having yields more than 10 percentage points higher than those on U.S. treasury bonds with similar maturities.
The index has lost 20 percent of its value so far this year, a more dramatic fall than it notched during the Great Recession in 2008 and making it one of the worst sell-offs “in history,” T. Rowe Price portfolio manager Samy Muaddi told Bloomberg.
Foreign investors yanked $4 billion from emerging markets in June alone, marking the fourth consecutive month of net withdrawals.
Many developing nations borrowed heavily at rock-bottom interest rates during the COVID War to pay their soaring costs of health care and keep their economies afloat.
Now that interest rates are rising, foreign investors are retreating to safer venues, such as treasury securities in the U.S. and Europe.
Making matters worse, commodity prices are softening as the world’s economy slows, as we report in “Is The Commodity Supercycle Over or Just Paused?” in this issue.
Sri Lanka already has stopped paying its foreign lenders after soaring food and energy prices sank the national economy and drove protesters into the streets. Mobs overran the presidential residence and burned the prime minister’s home, after which the officials pledged to resign.
Lebanon also has defaulted, as did Russia late last month as its foreign reserves remained tangled in Western sanctions.
“With the low-income countries, debt risks and debt crises are not hypothetical,” World Bank chief economist Carmen Reinhart told Bloomberg. “We’re pretty much already there.”
In recent decades, even a single default among vulnerable debtor nations has led anxious investors to pull their money from other weak economies that then defaulted, creating a self-fulfilling fear.
Today’s teetering debt load threatens to set off what Bloomberg called “a historic cascade of defaults.”
The most vulnerable countries are smaller with less time dealing in international capital markets. In contrast, countries such as Brazil, China, Mexico, and India have played on the world stage longer and hold substantial foreign currency reserves.
The continuing strong dollar and rising interest rates “are things that are going to continue to resonate in the second half of the year,” Anupam Damani, international debt analyst at Nuveen, said to Bloomberg.
“There’s a lot of academic literature and historical precedence in terms of social instability that higher food prices can cause, and then that can lead to political change,” she pointed out.
“This could have really long-term impacts that actually change the way we think about emerging markets, and in particular, emerging markets in a strategic context,” Gene Podkaminer, Franklin Templeton Investment Solutions’ research chief, said in a Bloomberg interview.
“The first thing it does is to reaffirm the reputation of emerging markets—they are volatile,” he added. “There were certainly periods of time when investors perhaps had forgotten that, but it’s hard to ignore that fact now.”
Caesar Maasry, head of emerging market strategy at Goldman Sachs Group, was more blunt.
“Things can get worse before they get better,” he said in a recent Bloomberg Intelligence webinar. “It’s late cycle. There’s not a strong recovery to buy into.”
TRENDPOST: Emerging nations’ debt load has been flashing alarm signals for more than a year, as we documented in articles such as “Emerging Markets Pile On Debt, Sparking Future Default Fears” (2 Feb 2021), “Emerging Markets Submerging” (9 Nov 2021), and “Investors Flee Emerging Markets” (14 Dec 2021), among other articles.
Our comment in “Strong Dollar Threatens Developing Nations” (27 Jul 2021) still stands: rising interest rates and a strong dollar will write yet another chapter in developing nations’ chronic debt crisis, consigning millions of people to poverty and sparking political turmoil across the southern half of the globe.
However, in this new chapter, developed nations are struggling to manage their massive new COVID-related debts, choking on inflation, and watching their own economies slow.
They will have less inclination, or ability, to bail out failing nations south of the Equator.
The exception is China, which will use the crisis to continue to distribute cash to countries it sees as strategically advantageous to its trade and geopolitical ambitions.
As a result, China will capitalize on the crisis to expand its global influence and secure future supplies of key minerals and other materials needed to maintain its manufacturing empire and develop its consumer economy.