How to Overcome Debt Crises in Developing Markets by Hippolyte Fofack

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Although the debt burden of developing countries has increased only moderately overall, the flow of funds they receive from capital markets has remained woefully low. Now that global financial conditions are tightening, advanced economies should reach out using the tools they already have.

CAIRO — Since the Latin American debt crisis of the 1980s, sovereign debt crises have become commonplace in emerging and developing economies. Now Sri Lanka needs a bailout from the International Monetary Fund after defaulting on its external debt in May, and a growing number of low-income countries are facing similar challenges. The World Bank estimates that around 60% of all emerging and developing economies have become high-risk debtors. Up to a dozen could default over the next 12 months.

Unlike advanced economies, where steep increases in public debt following the emergence of COVID-19 encouraged a rapid return to trend growth, developing economies have been constrained by a shortage of vaccines and a lack of headroom. monetary and fiscal maneuver. Unable to deficit-finance their exit from the synchronized global downturn, these countries must now deal with the economic fallout from the Ukraine crisis, which virtually eliminates a short-term return to pre-pandemic growth rates.

With a few exceptions – Sri Lanka and Zambia, for example – most developing economies are not heavily indebted. Collectively, their average debt-to-GDP ratio has only increased by seven percentage points (to 65%) since the start of the pandemic, far less than the 20 percentage point increase in advanced economies where combined sovereign debt now represents on average 122% of GDP. The flow of funds that developing economies receive from global bond markets and banks has remained woefully low. According to the most recent estimates from the Institute of International Finance, their combined sovereign liabilities represent less than 30% of global public debt.

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