About one in four emerging nations that owe debt payments in hard currencies such as dollars or euros now see their bonds categorized as “distressed,” according to the International Monetary Fund (IMF).
“Distressed” means that the bonds’ yields are at least ten percentage points above the yields of U.S. treasury securities.
When interest rates were low during the COVID War, many of these nations issued bonds—in other words, borrowed heavily—to cover costs of caring for their sick and to keep their economies going.
Now that rates are rising amid rampant inflation, the same countries are facing mounting challenges to making payments on those debts.
Debt among emerging nations jumped to about $100 trillion at the end of last year from $65 trillion in 2016, according to the Institute of International Finance.
“Many countries are either already in distress or will be in the near future,” Tobias Adrian, who heads the IMF’s office of monetary and capital markets office, told the Financial Times.
Among those most vulnerable: Bhutan, Egypt, and Tunisia, the IMF said. Sri Lanka defaulted on its debt earlier this month.
“At some point, some major emerging market”—India, for example— “could come into distress and the picture could change,” he added. “It depends on how adverse the evolution of financial sector shocks is going to be.”
Central banks in the developed world are balanced on a “tightrope” as they try to calm inflation amid unstable financial markets and geopolitical turmoil, the IMF said in its semi-annual Global Financial Stability Report, published 19 April.
“A disorderly tightening of global financial conditions would be particularly challenging for countries with high financial vulnerabilities, unresolved [COVID]-related challenges, and significant external financing needs,” the report noted.
The IMF has cut a full point from its estimate of emerging nations’ economic growth this year, setting it now at 3.8 percent.
TREND FORECAST: The higher U.S. interest rates rise the deeper emerging markets will descend since many commodities are dollar based. Thus, the stronger the dollar gets and the lower their currencies fall, the more it will cost them to buy products. And, since much of their debt is dollar based, it will cost more to service it, thus their debt load will grow heavier.
And, as emerging markets sink lower, there will be escalating social unrest as people take to the streets to protest rising prices, lower wages, higher poverty levels, government corruption, crime and violence. This will also increase migration to other nations for those wishing to escape the declining state of affairs.