Debt crisis: which countries are at risk of defaulting?
The traditional signs of the debt crisis, collapsing currencies, 1,000 basis point bond spreads and depleted foreign exchange reserves indicate that a record number of developing countries are now in trouble.
Lebanon, Sri Lanka, Russia, Suriname and Zambia are already in default, Belarus is on the brink and at least a dozen others are in the danger zone as rising borrowing costs , inflation and debt are fueling fears of an economic collapse.
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Totaling up the cost is mind-boggling. Using bond spreads of 1,000 basis points as a pain threshold, analysts calculate that $400 billion of debt is at stake. Argentina has by far the most with over $150 billion, while next are Ecuador and Egypt with 40 to 45 billion dollars.
Crisis veterans hope many can still dodge default, especially if global markets calm down and the IMF lends support, but those are the countries at risk.
The sovereign default world record holder looks likely to add to his tally. The peso is now trading at a discount of almost 50% on the black market, reserves are extremely low and bonds are trading at just 20 cents on the dollar – less than half of what they were after the restructuring of the country’s debt in 2020.
The government has no substantial debt to repay until 2024, but it escalates thereafter and concerns have crept in that powerful Vice President Cristina Fernandez de Kirchner could push to give up the International Monetary Fund.
Russia’s invasion means Ukraine will almost certainly have to restructure its more than $20 billion debt, heavyweight investors such as Morgan Stanley and Amundi warn.
The crisis comes in September when $1.2 billion in bond payments are due. Aid money and reserves mean Kyiv could potentially pay. But with state-owned Naftogaz this week asking for a two-year debt freeze, investors suspect the government will follow suit.
Africa has a group of countries going to the IMF, but Tunisia seems to be one of the most at risk.
A budget deficit of almost 10%, one of the highest public sector wage bills in the world and it is feared that it will be difficult to obtain, or at least to stick to, an IMF program due to President Kais Saied’s efforts to strengthen his grip on power and the country’s powerful and incalcitant union.
Tunisian bond spreads – the premium demanded by investors to buy debt rather than US bonds – have reached over 2,800 basis points and, along with Ukraine and El Salvador, Tunisia is on the list of the top three defaulters likely from Morgan Stanley. “An agreement with the International Monetary Fund becomes imperative,” said the head of Tunisia’s central bank, Marouan Abassi.
Furious borrowing has pushed Ghana’s debt-to-GDP ratio to almost 85%. Its currency, the cedi, has lost nearly a quarter of its value this year and it was already spending more than half of tax revenue on debt interest payments. Inflation is also approaching 30%.
Egypt has a debt-to-GDP ratio of almost 95% and has seen one of the largest outflows of international cash this year – some $11 billion according to JPMorgan.
Fund firm FIM Partners estimates that Egypt has $100 billion in hard currency debt to repay over the next five years, including a large $3.3 billion bond in 2024.
Cairo devalued the pound by 15% and asked for IMF help in March, but bond spreads are now above 1,200 basis points and credit default swaps (CDS) – a tool for investors to hedge risk – evaluate at 55% the probability that he will fail on a payment.
Francesc Balcells, CIO of emerging debt at FIM Partners, however, estimates that around half of the $100 billion Egypt needs to pay by 2027 is earmarked for the IMF or bilaterally, mostly in the Gulf. “Under normal conditions, Egypt should be able to pay,” Balcells said.
Kenya spends about 30% of its income on interest payments. Its bonds have lost almost half their value and it currently has no access to capital markets – a problem with a $2 billion bond maturing in 2024.
Regarding Kenya, Egypt, Tunisia and Ghana, David Rogovic of Moody’s said: “These countries are the most vulnerable simply because of the amount of maturing debt relative to reserves and the fiscal challenges in terms of stabilization of the debt burden”.
Addis Ababa plans to be one of the first countries to receive debt relief under the G20 Common Framework Programme. Progress has been hampered by the country’s ongoing civil war, although in the meantime it continues to service its only billion-dollar international obligation.
Making bitcoin legal tender pretty much closed the door to IMF hopes. Confidence has fallen to the point where an $800 million bond maturing in six months is trading at a 30% discount and longer-term bonds at a 70% discount.
Pakistan reached a crucial agreement with the IMF this week. The breakthrough could not have been more timely, with high energy import prices pushing the country to the brink of a balance of payments crisis.
Foreign exchange reserves fell to $9.8 billion, barely enough for five weeks of imports. The Pakistani rupee weakened to record lows. The new government must now rapidly reduce its expenditure since it devotes 40% of its income to the payment of interest.
Western sanctions forced Russia into default last month and Belarus now faces the same harsh treatment after backing Moscow in the Ukraine campaign.
The Latin American country only defaulted two years ago, but was thrown back into crisis by violent protests and an attempt to oust President Guillermo Lasso.
It has a lot of debt and with the government subsidizing fuel and food, JPMorgan has raised its public sector budget deficit forecast to 2.4% of GDP this year and 2.1% next year. Bond spreads exceeded 1,500 basis points.
Bond spreads are just over 1,000 basis points, but Nigeria’s next $500 million bond payment in a year should easily be covered by reserves that have been steadily improving since June. However, it spends nearly 30% of government revenues to pay the interest on its debt.
“I think the market is overpricing a lot of these risks,” said Brett Diment, head of emerging market debt at investment firm abrdn.