Developing countries’ debts mount as pandemic and strong dollar hit finances

Developing countries’ stockpile of debt hit a fresh record high last year, the Institute of International Finance said on Wednesday, adding to concerns of a wave of sovereign defaults this year.

The combined government, household, corporate and financial sector debts of 30 large low and middle-income countries rose to $98tn at the end of December, as their currencies slumped against the dollar.

The debt burden for the 30 countries was up from $96tn a year earlier and from $75tn in 2019, before the pandemic began, the IIF, a trade body for the global banking industry, said in the latest edition of its quarterly Global Debt Monitor.

Government debts alone hit almost 65 per cent of gross domestic product by the end of 2022 — an increase of 10 percentage points over pre-pandemic levels and the highest-ever year-end total.

The dollar soared against most emerging market and advanced economy currencies over the course of 2022, raising the cost of meeting existing debt obligations — many of which are denominated in the US currency.

The dollar’s rise followed the US Federal Reserve’s aggressive interest rate increases to combat high inflation, which had a knock-on impact on global borrowing costs.

The US currency has weakened since the autumn. However, Ed Parker, head of sovereign research at Fitch, the credit rating agency, on Wednesday warned 2023 would be “another challenging year” as the dollar remained strong by historical standards.

Debts and deficits would “remain well above pre-Covid levels”, he said during an event organised by the IIF.

Pakistan and Egypt — both included in the list of 30 — are among the countries considered at high risk of default. Both countries sharply devalued their currencies against the dollar in January, partly in an attempt to unlock emergency funding from the IMF.

The strength of the dollar against most emerging market currencies last year led investors to dump emerging market stocks and bonds. This trend went into reverse last October after the dollar weakened. However, recent data on the US economy suggesting inflation and interest rates may remain high for longer than expected has led to a fresh bout of dollar strength.

Emre Tiftik, an IIF economist, said the dollar’s strength had left low-income countries facing extra funding costs as many relied heavily on dollar-denominated funding to secure interest from global investors.

Sri Lanka and Ghana both defaulted on external debts in 2022, following Zambia in 2020. The ratio of debt service costs to government revenues had risen to “exceptional levels”, Parker said.

In advanced economies, total debt declined almost $6tn to just under $201tn, leaving the total global debt burden down slightly, from $303tn at the end of 2021, to below $300tn at the end of last year.