There has been a warning that foreign currency debt defaults in emerging countries will increase rapidly over the next 10 years. Although countries around the world have begun to ease monetary policies and cut interest rates, many emerging countries are still struggling with high-interest debt. It is pointed out that the possibility of default is rapidly increasing as there is no suitable channel to exchange high interest rate debt for low interest rate debt while ignoring restructuring.
45 defaults since 2000
Standard & Poor’s (S&P), an international credit rating agency, warned on the 14th (local time) that “emerging countries will default more frequently than in the past over the next 10 years due to the enormous amount of debt and increased borrowing costs, including dollar-denominated debt.” did it According to S&P, a total of 45 foreign currency debt defaulted between 2000 and last year. Between 2022 and 2023 alone, 9 cases occurred in a concentrated manner. Debt defaults have increased rapidly over the past two years. Countries that failed to repay their foreign currency debt on time during this period include Belize, Zambia, Ecuador, Argentina, Lebanon, Suriname (2 cases), Ukraine, and Russia.
Ukraine temporarily suspended debt repayments due to Russia’s invasion in 2022. It later restructured more than $20 billion of debt, the largest amount since Argentina defaulted in 2020. The Financial Times (FT) reported, “Although interest rates around the world have now entered a downward trend, many countries are in a situation where they lack the resources to repay foreign currency debt or even have difficulty accessing capital.”
This year, Kenya and Pakistan barely avoided debt default thanks to bailouts from the International Monetary Fund (IMF). However, these countries still do not have access to bond markets and are unable to refinance their debt. This means that default can occur again at any time. The borrowing costs of countries with similar credit ratings are already in the double digits. This month, Ghana completed the restructuring of its dollar bonds and escaped the crisis of default, but the principal loss rate for creditors reached 37%.
Finance 20% interest
According to S&P’s analysis of default cases over the past 20 years, developing countries are relying more on government borrowing (government debt) to guarantee the inflow of foreign capital. S&P’s analysis is that when this dependence is combined with problems such as unpredictable government policies, lack of central bank independence, and immature capital markets, it often leads to repayment problems. Increased government debt and fiscal imbalances can trigger capital outflows, which in turn can lead to a vicious cycle that puts pressure on the balance of payments, depletes foreign exchange reserves, and blocks additional borrowing capacity.
S&P pointed out, “It is also a problem that debt restructuring is taking much longer than in the 1980s.” The explanation is that it has become more difficult for low-income countries to escape default because they must negotiate restructuring or rescue with a wider variety of creditors than in the past, including private financial companies, other countries, and international financial organizations. This also increases the likelihood of further defaults. Frank Gill, a bond expert at S&P, said, “The credit ratings of countries that have completed debt restructuring are downgraded compared to the past, which suggests the possibility of repeated defaults.” Regarding signs of default, he said, “It is estimated that in the year immediately before countries stop repaying their debt, on average, about one-fifth of their total national revenue, including tax revenue, is used to pay interest.”
In the ‘Fiscal Monitor’ report released on the 15th, the IMF said, “Global public debt (government debt) will exceed $100 trillion, or 93% of global gross domestic product (GDP), by the end of this year.” It was predicted that the proportion of public debt to GDP would approach 100% by 2030. If an extreme scenario is followed, the public debt share could reach 115% by 2026.
Reporter Kim Rian knra@hankyung.com
