As interest rates rise, and poorer countries struggle to refinance borrowings, a Finance for Development Lab model shows that developing nations may need to find as much as $2.5 trillion over five years to meet external debt-service costs.
The findings by the Bill Melinda Gates Foundation-backed and Paris-based think tank assume interest rates are climbing by 400 basis points from levels in 2019 and a 10% decline in currencies against the dollar. It analyzed conditions in 113 countries, with China and Russia excluded as well as some nations for which data wasn't available.
The authors of a paper based on the model titled The Coming Debt Crisis said that the current costs of funding make debt service hard to sustain, with an expected peak in 2024 -- 25. If such conditions were to hold, a major liquidity crisis would quickly turn into a widespread solvency crisis. The Developing nations with weaker sources of revenue have suffered from rising interest rates and increased borrowing, a result of the Covid 19 epidemic and Russia's invasion of Ukraine, which has resulted in a rise in world food and energy prices. Commercial lenders offer shorter maturities, and capital markets are largely closed to many governments, which means a greater proportion of poorer-country debt is now due to poorer-country debt.
In 2026, the debt stock for the nations is expected to increase to $4.3 trillion, from $2.9 trillion last year and $2 trillion in 2016 according to Charles Albinet and Martin Kessler, authors of the paper for the think tank, which was founded earlier this year.
Under the scenario, 35 countries would cross what they said are debt-service risk thresholds, compared with 22 currently, and the number in sub-Saharan Africa would jump to 18 from 10.
In 2020, a category that includes countries ranging from Ghana to El Salvador, would see their median debt-service-to-revenue ratio rise to 15% from 10%, an amount that some countries would surpass their health and education budgets.
Some debt walls may be hit as payments come due. In 2024 and 2025, Africa will see an increase in eurobond redemptions to between $9 billion and $10 billion compared to $2.5 billion in 2019 for sub-Saharan Africa excluding South Africa. In 2025, the Latin American nations will have to pay $17.5 billion in redemptions, up from $9 billion in 2023.
If the current conditions were to continue, a generalized debt crisis could occur, especially in sub-Saharan Africa and lower-middle-income countries, the authors warned.
They said strategies will need to be devised to avoid debt crises.
The real danger comes from increases in debt service in many countries. They said that it's essential to reduce debt and resiliency to shocks. There will be some breathing space during the shock due to some kind of forbearance and rolling over of debt. It is important to have the ability to reschedule debt payments. The amount of help from global official development finance institutions will need to be increased, they said.
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