Low-income nations seek debt solutions as interest rates rise and inflation worsens

The sooner countries start addressing these issues, the lower the cost of resolving the debt crisis will be, Alvarez & Marsal executive says

A Sudanese grocery shop owner counts money in the capital Khartoum. Sudan is facing debt distress and rising inflation as food shortages worsen its economic crisis. AFP

The appetite for sovereign debt restructuring has significantly risen, with low-income and developing nations finding it difficult to manage borrowings amid a steep rise in interest rates and inflation hitting double digits in some countries, the global head of Alvarez & Marsal's sovereign advisory says.

The global consultancy, which launched sovereign advisory services this year, is already in talks with governments in the Middle East, Asia and Africa looking for solutions to lighten their debt burden and manage finances of public sector companies that are draining resources, Reza Baqir said.

“We are engaged in several conversations right now with a diversity of status: some more advanced, some less advanced,” Mr Baqir told The National.

“There is an appetite, a growing appetite [for debt restructuring] … not just at a country level but also at a global level.”

Emerging and developing economies are where “you will see a combination of issues related to debt, related to state-owned enterprises as well as creation and growth of sovereign wealth funds”, Mr Baqir said.

He is a former International Monetary Fund executive and was governor of the State Bank of Pakistan.

Lower and middle-income countries, excluding China, have steadily accumulated debt since 2010.

Their debt to gross national income ratio jumped to 36.3 per cent in 2021 from 25.6 per cent in 2010, according to World Bank’s International Debt Report, launched last year.

Total external debt of all developing economies, including low and middle-income countries, surged to $9 trillion at the end of 2021, more than double the amount a decade ago.

Debt of the poorest countries eligible to borrow from the World Bank’s International Development Association nearly tripled to $1 trillion over the same period, according to World Bank data.

These countries now spend more than a tenth of their export revenues to service their long-term public and publicly guaranteed external borrowings — the highest proportion since 2000.

Global economic challenges and rising cost of borrowings are tipping a large number of countries into debt crises.

About 60 per cent of the poorest countries are already at high risk of debt distress or already in distress, the World Bank estimates.

Central banks around the globe are raising their benchmark interest rates to curb a sharp rise in inflation.

In December, the US Federal Reserve increased its the policy rate by 50 basis points, bringing interest rates to a range of 4.25 per cent and 4.50 per cent, the highest in 15 years.

The Fed, along with the Bank of England and the European Central Bank are expected to continue increasing rates to control inflation.

After hitting 8.8 per cent in 2022, global inflation is expected to fall to 6.6 per cent in 2023 and 4.3 per cent in 2024, although it will still be above pre-pandemic levels of about 3.5 per cent, the IMF said in its latest economic outlook.

Developing and emerging economies in the past were able to roll over their debts as interest rates were kept low for a very long time after the global financial crisis, Mr Baqir said.

But this time the global environment is very different, posing growing challenges amid higher interest rates.

The rise in inflation has also brought its own set of domestic economic challenges, he said.

“This, in our view, is intricately related to appetite. Our key goal is to help sovereigns address these problems earlier, rather than later,” he said.

The sooner countries start addressing these issues, the lower the cost of resolving the debt crisis will be, Mr Baqir added.

Globally, the ratio of debt to gross domestic product fell for a sixth consecutive quarter in the July-September period to 343 per cent of GDP, however, emerging markets bucked the trend, the International Institute of Finance said in November.

The world's debt-to-GDP ratio was 20 percentage points lower at the end of the third quarter than its peak in the first quarter of 2021, with global debt declining by $6.4 trillion to $290 trillion, the IIF Global Debt Monitor report showed.

This is more than $15 trillion below its record of $306 trillion in the first quarter of 2022.

But persistently large budget deficits coupled with subdued economic growth have brought the emerging markets' debt-to-GDP ratio back to its record high of 254 per cent, last registered in the first quarter of 2021, the institute said.

Emerging market government debt topped 65 per cent of GDP in the third quarter, while the financial sector’s debt passed 40 per cent of GDP, according to IIF data.

Governments must take prudent measures to manage debt and their fiscal policies amid weaker global economic growth and tighter monetary policy to avoid future pain, the IMF said last month.

Managing current high levels of debt will become increasingly difficult with a rise in borrowing costs and weakening global growth, the Washington-based lender said at the time.

“More importantly, when you look at the projections from the IMF, the average debt-to-GDP for emerging markets is expected to rise from 65 per cent of GDP now, to about 80 per cent of GDP in 2027,” Mr Baqir said.

“There will be many countries that will be considerably above that average number of 80 per cent”, so the outlook for many of these economies is challenging as the level of public debt is expected to grow over the next five years, he said.