Debt Crisis in Emerging Markets and Global Response Measures
Ms. Aditi Gupta
Research Assistant, RIS
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. 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. The average ratio of external debt to GDP of developing and transition economies increased from 23% in 2008 to 29% in 2019. Of the total external debt of developing and transition economies in 2019, 20% was accounted for by the Chinese economy. 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.
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.
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.
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.
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.
 Bloomberg. (2020, October 16). Why There’s a Looming Debt Crisis in Emerging Markets.
 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
 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/
 Daniel Munevar. (2020, April 21). G20 debt service suspension: A response not fit for purpose (I). Eurodad. See: https://www.eurodad.org/g20_debt1
 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