The View | A developing-country debt crisis is looming, but it can be headed off
- Developing economies are coming under increasing pressure and an estimated dozen are at risk of defaulting on their debts in the next 12 months
- As global financial conditions tighten, advanced economies can lend a hand using policy tools that are already available
The World Bank estimates that around 60 per cent of all emerging and developing economies have become high-risk debtors. As many as a dozen might default in the next 12 months.
With a few exceptions, most developing economies are not heavily indebted. The flow of funds that developing economies receive from global bond markets and banks has remained dismally low, though. According to recent estimates from the Institute of International Finance, their combined sovereign liabilities represent less than 30 per cent of global public debt.
Worse, following post-pandemic credit downgrades, many low-income countries cannot access international capital markets and face acute liquidity constraints that could morph into solvency crises. Because their sub-investment-grade credit ratings have raised their borrowing costs, their governments’ reduced ability to roll over their liabilities as they come due has raised the prospect of a developing-country debt crisis.
For example, Ghana planned to issue a bond to refinance its foreign currency-denominated debt earlier this year. But with a wave of ratings downgrades driving up international bond yields, it has effectively been shut out of international financial markets, and its 10-year sovereign bond yield has risen above 22 per cent. After resorting to painful internal adjustments during the pandemic, Ghana faces soaring food prices and its government is seeking IMF assistance.