Debt Crisis in Emerging Markets and Global Response Measures
Ms. Aditi Gupta
Research Assistant, RIS
Introduction
A
recent Dev Talk by OECD on “Debt sustainability and COVID-19: what’s next for
Africa and Latin America" threw light on the issue of debt sustainability
in emerging markets. By the end of the first quarter of 2020, the
foreign-currency debt of emerging market economies amounted to more than USD
8.4 trillion[1].
COVID-19 crisis further exacerbated the debt crisis in developing economies.
The situation has worsened as local currencies have become weak, government
revenues and foreign exchange reserves have fallen along with tightening of
credit markets. Countries like Venezuela, Argentina, and Lebanon have already
defaulted on their debts. Average public debt ratios were expected to rise up
to 70% of African countries’ GDPs by 2020 and up to 75% of Latin American
countries’ GDPs by 2021.
Under
the COVID-19 crisis, various national governments assisted vulnerable
households with unemployment benefits and subsidies and provided loans and tax
breaks to the private sector. Many poor countries depended on borrowings and
multilateral support to finance these measures. According to the IMF’s Debt
Sustainability Framework, around half of all low-income economies were already
under debt distress even before the pandemic began.
Debt Crisis in Emerging Economies
In
developing countries, both the public and private debt has increased as total
global debt has continued to rise. In 2018, total global debt rose to USD 228
trillion in comparison to USD 152 trillion in 2008 at the start of global
financial crisis[2].
The average ratio of external debt to GDP of developing and transition
economies increased from 23% in 2008 to 29% in 2019[3]. Of
the total external debt of developing and transition economies in 2019, 20% was
accounted for by the Chinese economy[4]. From
2000 to 2018, the share of short-term debt and publicly non-guaranteed long-term
debt has risen in total external debt. At the same time, household debt as a
percentage of GDP also grew from 26% in 2009 to 43% in 2019[5].
Borrowing
by developing countries has increased over the years due to the international
interest rates which have remained low for a long period because of 2008-09
global financial crisis as well as high levels of global liquidity due to
quantitative easing. Some major emerging market economies that borrowed heavily
during this period include Brazil, Argentina, Turkey, South Africa, Saudi
Arabia, and Egypt. By April 2020, Latin America had the highest debt service to
exports ratio, while East Asia had the biggest amount of debt service in
absolute terms.
Global Response to Debt Crisis
There
have been several calls for the G-20, IMF, World Bank and the UN for the
creation of a debt standstill framework. The G20 nations announced the Debt
Service Suspension Initiative (DSSI) in April 2020, under which it was agreed
to suspend public external debt service for 77 developing countries in order
for them to deal with the COVID-19 pandemic. Under DSSI, payments of up to USD
12 billion by poor countries to official bilateral creditors were postponed till
the end of 2020. In this way, it was suggested that G20 DSSI could benefit the
beneficiary countries in freeing up resources to fight COVID-19 pandemic. However,
there were limitations to the benefits that G20 DSSI could provide to the
eligible countries. It is because these eligible countries were still required
to meet their external debt service obligations to multilateral and private
creditors. Secondly, the support being offered to beneficiary countries was of
a short-term nature[6].
During
the early days of the COVID-19 crisis, it was suggested by the IMF that it
would allocate more of its Special Drawing Rights which could then be sold by countries
for cash. Although this was supported by various governments, the World Bank
and the UN, the Trump administration vetoed it. SDRs issued by the IMF are
international monetary assets which can be sold to other central banks and are
part of foreign exchange reserves of a country. Such an option was advocated to
be useful for debtor countries as it provides them with liquidity immediately
and does not require policy conditions[7].
The
UN, world leaders and various debt campaigners have also called for
multilateral institutions to cancel outstanding loans. According to the World
Bank, DSSI countries owed USD 243 billion to multilateral institutions by the
end of 2019. It has also been suggested by debt campaigners that commercial
lenders should also take part in the DSSI. Around 19% of the debt stock of the
DSSI countries is held by the commercial lenders[8].
Way Forward
There
is a need for restructuring the sovereign debt and provide temporary debt standstills
to developing nations. Multilateral institutions could also consider debt
cancellation for those low-income countries which are in crucial need of
financial assistance. Recently a policy brief issued by the UN Secretary-General
António Guterres, made a recommendation for a new SDR allocation and voluntary
reallocation of SDRs from countries with adequate international reserves to
vulnerable and conflict-affected countries facing external deficits. This would
provide the much needed balance of payment support to needy countries. The
policy brief, amongst several other recommendations, also urged the G20 to
extend the DSSI at least till the end of June 2022 and include middle-income
countries, especially SIDS, and other vulnerable countries. Lastly, there is a
need to look at the issue of debt sustainability for developing countries from
a long-term perspective and decisive actions must be taken urgently by the IMF,
World Bank and global leaders in order to prevent insolvency crisis in
low-income nations.
[1] Bloomberg. (2020,
October 16). Why There’s a Looming Debt Crisis in Emerging Markets.
[2] United Nations. (2020).
Financing for Sustainable Development Report 2020: Inter-agency Task Force on
Financing for Development. See: https://developmentfinance.un.org/sites/developmentfinance.un.org/files/FSDR2020_ChptIII.E.pdf
[3] SDG Pulse. (2020).
Developing country external debt: From growing sustainability concerns to
potential crisis in the time of COVID-19. See: https://sdgpulse.unctad.org/debt-sustainability/
[4] Ibid
[5] Ibid
[6] Daniel Munevar. (2020,
April 21). G20 debt service suspension: A response not fit for purpose (I). Eurodad. See: https://www.eurodad.org/g20_debt1
[7] Jonathan Wheatley.
(2020, December 20). Debt dilemma: how to avoid a crisis in emerging nations. Financial Times. See: https://www.ft.com/content/de43248e-e8eb-4381-9d2f-a539d1f1662c
[8] Ibid
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