Leading emerging countries have burned through $240bn in foreign exchange reserves over the past two months, Bank of America said on Monday, as central banks look to prop up their currencies.
As governments stare down the humanitarian and economic shocks of the pandemic, some EMs with weak financial positions are at greater risk of defaulting on their debts.
At least 102 nations have already asked the International Monetary Fund for help, and the Institute of International Finance is co-ordinating an effort to offer some relief to the poorest countries.
Emerging markets owe more than $8.4tn in foreign-currency debt, or about 30% of the developing world’s gross domestic product. At least $730bn is coming due through the rest of this year.
The fear is that weakening local currencies, dwindling foreign reserves and slower global growth – compounded by lower oil prices – will make it harder for some developing countries to keep up on their external debt payments.
While some nations – Argentina, Lebanon and Venezuela among them – were in trouble long before Covid-19 scared investors out of risky assets, the pandemic has pushed at least 15 others to linger in distressed territory.
Leaders of the Group of 20 developed nations have backed temporarily waiving debt payments by some of the world’s poorest countries, mostly in Africa. The IIF, which represents the world’s biggest banks and financial institutions, is helping spearhead the voluntary initiative.
Still, only about 73 countries will be eligible to request access to the programme. Meanwhile, the IMF has granted debt waivers to at least 25 countries.
One obvious option for the EMs is a so-called standstill – forbearance on external debt-service payments through at least the end of this year. This would give countries room to spend on health services and measures to prop up their economies.
A possible step further would be a programme to help some governments restructure their debt loads once there’s enough information to run sustainability analysis.
One way to avoid individual countries being singled out for requesting debt relief might be found in a global initiative proposed by the United Nations Economic Commission for Africa.
The plan, built on the 1980s Brady Plan used to help indebted Latin American economies, would swap bonds for cheaper notes backed by international institutions.
But the key difference now is that the Brady Plan mainly transformed commercial bank loans, many of which were already defaulted, into collateralised bonds.
Today, emerging markets owe money to a wide range of creditors, and a relief plan would need the backing of hundreds of creditors from New York hedge funds to sovereign wealth funds and Asian pension funds.
The deeper problems in the EMs stem from the excessive financialisation of the global economy that has occurred since the 1990s. The resultant policy dilemmas – rising inequality, greater volatility, reduced room to manage the real economy – are seen continuing to preoccupy policymakers in the decades ahead.
Without a significant home-grown investor base, supported by futuristic policy initiatives and structural reforms, emerging countries risk a return to the old boom-bust cycles of the 20th century.
