Emerging economies face rising debt burden amid ‘lost decade’ warning

Developing nations spent a record $443bn on debt service payments in 2022, according to the World Bank, which has warned the situation risks tipping them into crisis and creating a “lost decade” of economic stagnation.
About a dozen developing nations are in default or have global bonds trading at levels that suggest the market is bracing for the country to miss payments, according to data compiled by Bloomberg.
The World Bank has warned that high borrowing costs have “changed dramatically” the need for developing nations to boost sluggish economic growth.
The multilateral lender’s latest warning comes as international bond sales from emerging market governments hit an all-time record of $47bn in January, led by less risky emerging economies such as Saudi Arabia, Mexico and Romania.
Data published by the Institute of International Finance last week showed global debt levels had touched a new record of $313tn in 2023 while the debt-to-GDP ratio – a reading indicating a country’s ability to pay back debts – across emerging economies also scaled fresh peaks, indicating more potential strains ahead.
The World Bank warned in its Global Economic Prospects report in January that the global economy was set for the weakest half-decade performance in 30 years during 2020-2024, even if recession is avoided.
Global growth is expected to slow for a third consecutive year to 2.4%, before ticking up to 2.7% in 2025.
The growth slowdown is particularly acute for emerging economies, around a third of which have seen no recovery since the Covid-19 pandemic and have per capita income below their 2019 levels.
If growth remains low, some emerging economies might face having to restructure debt by reprofiling maturities or agreeing haircuts with creditors.
Principle payments of emerging markets’ sovereign Eurobonds will spike to $78.4bn in 2024, from $43.6bn last year, according to JPMorgan.
The bill due for lower-rated emerging sovereigns will surge to over $65bn in total for 2024 and 2025 combined, up from just over $8bn this year.
Countries will need to either find the cash to pay, or a new lending source to refinance.
The Covid-19 pandemic exacerbated the debt problem that was already weighing down the world’s poorer countries. In response, richer countries, meeting in the Group of 20 forum in 2020, created a co-ordinated plan for debt relief called the Common Framework.
It was designed to reflect a new reality: China now lends far more to developing countries than the mostly Western nations of the Paris Club, the body that had overseen international debt negotiations for decades.
As 2023 ended, the Common Framework had yet to produce any meaningful relief. Economists worry that a failure to resolve the stalemate could lead to or deepen economic stagnation for large swaths of the globe.
In 2022, developing countries faced a collective debt stock of about $9tn, with annual service payments hitting a record $443bn, according to the World Bank, which estimates that the service burden will continue to grow.
The situation has left roughly 60% of the world’s 75 poorest countries in or near debt distress.
The deeper problems in the emerging economies 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.
The World Bank and others have warned about a “lost decade” for poorer countries, as debt payments and lack of access to capital diminish resources that could otherwise be used for education, health and the environment.