Dusseldorf Around $30 billion: That is the sum of the debt that the 160 emerging and developing countries will have to refinance in 2024 alone. In 2025, according to an analysis by ING Bank, it could even be around $39 billion – a huge increase compared to the just $8 billion still due as of March this year.
No wonder the International Monetary Fund (IMF) recently warned of a growing “wall of debt” that has emerged over the past few years from a combination of rising loan amounts and shorter maturities. A critical refinancing phase is now imminent – and this could hardly be managed due to the high interest rates.
While the debt of the emerging countries relative to economic output was still an average of 37.4 percent in 2010, the ratio in 2021 was around 64 percent. In developing countries, the rate rose from 28 to 48.7 percent. At the same time, the maturities of the loans have shortened over the years: “The considerable increase in the issuance of government bonds with shorter maturities means … more difficult repayment,” according to an analysis by the IMF.
After governments had to take out large sums of money for their aid programs during the pandemic years – albeit at low interest rates at the time – many countries are now facing mountains of maturities. According to the Bloomberg news agency, more than 70 developing countries around the world have a total debt of around USD 326 billion.
In order to avoid national bankruptcy, emerging and developing countries are planning to reschedule their bonds or are negotiating bailout loans. There is no sign of the situation calming down for the time being.
Ghana: Finance minister plans to restructure domestic bonds
According to the IMF, Africa is particularly affected by the debt stress due to approaching repayment demands: Almost two thirds of the countries on the continent are exposed to a high debt risk and are unable to take out the loans in all likelihood not repay reliably.
In recent years, there have been defaults in Zambia and Ghana, outside of the continent in Pakistan and Sri Lanka, among others. “Higher interest rates and widening government bond yield spreads are making financing more expensive or even unaffordable,” the IMF said in a statement.
“We expect that current interest rate levels and the reduction in capital flows to developing countries will continue to put significant financial pressure on them,” Bloomberg quoted World Bank President David Malpass as saying. Malpass recently warned of the serious consequences of a possible debt crisis and appealed to the G7 countries to support the developing countries’ debt restructuring programs.
Ghanaian Finance Minister Ken Ofori-Atta recently warned that the country’s public debt was no longer sustainable. Debt service now devours “more than half of total government revenue and almost 70 percent of tax revenue”.
The country has therefore applied for a $3 billion bailout loan from the IMF. The measure was approved in mid-May. Ghana is expected to receive $1.2 billion later this year, then another $350 million every six months. The highlight: According to the IMF, the country owes around 1.9 billion dollars to the People’s Republic of China alone, almost two-thirds of the total value of the rescue loan.
Ghana’s Finance Minister Ken Ofori-Atta speaks with Stephane Roudet, the country’s IMF representative.
(Photo: Reuters)
In order to be able to receive the IMF money at all, Ghana had to reschedule its bonds on a large scale: At the beginning of 2023, Finance Minister Ofori-Atta launched an exchange program for domestic creditors, in which old, high-yield government bonds that were due to mature soon were exchanged for new, low-yielding bonds be exchanged over a longer period of time. In this way, Ghana’s debt burden should be reduced “in the most transparent, efficient and speedy manner possible”. In all, about $8 billion in bonds with an average yield of 19 percent were exchanged for bonds with an interest rate of 8.35 percent.
Around eight percent of Ghana’s domestic government debt is financed by pension funds and insurance companies. The exchange therefore led to protests among the Ghanaian population, who feared for the security of social benefits.
In February, the government announced that more than 80 percent of creditors, mostly banks and corporations, would participate in the bond swap – but not entirely voluntarily: according to rating agency Fitch, non-participating banks are not eligible for liquidity support from the government’s Financial Stability Fund.
Poorer countries are in a dilemma: they need more money and there is less security
Time is running out for many emerging and developing countries, whose market access is limited by high interest costs, says James Wilson, who researches emerging market bonds for ING Bank. Funding pressures from African countries like Kenya, Egypt and Angola “are likely to persist for years to come.” This means that countries that do not now launch programs to restructure their debt could suffer even more from the repayment burden in the coming years.
Countries like Ghana have to promise creditors high yields on their government bonds in order to get money. The spreads of African developing countries – the difference between the yield on their government bonds and that on US bonds, each with a maturity of ten years – are sometimes ten percentage points or more.
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In the meantime, the difference has shrunk in the pandemic year 2020 because this should enable poorer countries to take out loans for their corona aid programs, explains Wilson. Today, however, it is back to the high previous level. This is the case, for example, in Kenya, Nigeria or Egypt.
Developing and emerging countries are in a dilemma: The extremely high yields they have to pay on their government bonds in order to get money are at the same time an indicator of a high need for money with little security.
Countries that are particularly vulnerable to natural disasters often fare worse in credit ratings. Climate change is making the situation worse.
(Photo: AP)
A look at the data from the rating agencies shows that the creditworthiness of most emerging and developing countries is poor. The IMF writes that there are also reasons for which the countries cannot do anything, for example an increased risk of being hit by natural disasters as a result of climate change.
Egypt is asking for a $3 billion bailout – IMF calls for reforms
Political crises can also lead to countries not paying back their debts on time or in full. This is currently the case in Pakistan. As Bloomberg reports, the country could default from June this year. The only solution for the Asian developing country: a $6.5 billion aid program from the IMF.
Pakistan is currently fighting for this help. But the chances of the country, whose financing needs could be almost 140 percent of state revenues and reserves in 2024, are poor in view of the ongoing political unrest.
Bailout packages from the IMF are a way for countries to at least cushion the debt crisis. Egypt is also currently negotiating a $3 billion rescue package with the organization.
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In return for the money, however, the IMF is demanding reforms: “On the one hand, restoring price stability through a tighter monetary policy or raising the key interest rate, and on the other hand protecting the weak population through targeted budget support for those in need,” explained the IMF representative for the country, Ivanna Vladkova Hollar, in January.
The organization is in a special negotiating position here: Egypt is the largest debtor to the IMF after Argentina, with an outstanding refinancing sum of more than $13.4 billion.
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