A dollar crawling to its highest level in two decades crushing the purchasing power of most currencies in international markets, fears of an economic slowdown and burnt foreign exchange reserves indicate that a record number of developing countries are currently in dire straits.
According to Reuters, a record number of developing countries are currently struggling as several countries exhibit economic malaise similar to that of Sri Lanka, including typical debt crises, signs of currency collapses, 1,000 basis points and foreign exchange reserves. See the list below.
Rising bond prices, inflation and debt are fueling fears of an economic collapse, with analysis showing that Sri Lanka, Lebanon, Russia, Suriname and Zambia are already in default, the Belarus is on the verge of default and at least another dozen countries are in danger of default.
The total price is staggering. Analysts estimate that $400 billion of debt is at risk using bond spreads of 1,000 basis points as the pain threshold. Argentina is the largest, with over $150 billion, followed by Ecuador and Egypt, each with between $40 and $45 billion.
The Russian ruble and the Brazilian real are the only currencies that have risen against the dollar this year, which many market experts believe is due to capital controls.
Investors wonder how long the surge in the dollar can last, but many are waiting to turn lower on the dollar before they do. Against a basket of peers, the dollar is up nearly 13% this year, hitting a two-decade high.
It’s also on track for its best year since 1997, thanks to a hawkish Federal Reserve and investors seeking safety in the face of uncertainty in the global economy. (Reuters chart: Currency markets in 2022)
See below for a list of countries at risk, based on a Reuters report:
Argentina(Reuters graphic: The pain has spread)
The world leader in sovereign default seems certain to increase its total. In the illicit market, the peso is currently trading at a nearly 50% discount, reserves are at historic lows and bonds are now worth 20 cents on the dollar, less than half their debt restructuring value. after 2020.
Although the government does not have a lot of debt to repay until 2024, it will start to pile up and there are growing fears that strong Vice President Cristina Fernandez de Kirchner will try to force Argentina to break up. its commitment to the International Monetary Fund.
Belarus (Reuters Chart: Belarus Bonds)
After standing with Moscow during the Ukraine campaign, Belarus is now subject to the same harsh sanctions that forced Russia to default last month.
The Latin American nation only went bankrupt two years ago, but violent protests and an effort to impeach President Guillermo Lasso have thrown it into turmoil.
It has significant debt and JPMorgan has raised its public sector budget deficit forecast to 2.4% of GDP this year and 2.1% of GDP next year because the government subsidizes food and fuel. Bond spreads exceeded 1,500 basis points.
Egypt (Reuters chart: The fall in Egypt’s foreign exchange reserves)
With a debt-to-GDP ratio of around 95%, Egypt has seen one of the largest outflows of foreign funds this year, JPMorgan estimates, totaling around $11 billion.
Egypt is expected to pay off $100 billion in hard-currency debt over the next five years, including a large $3.3 billion bond, in 2024, according to fund management firm FIM Partners.
Cairo reduced the value of the pound by 15% and requested IMF assistance in March. Yet bond spreads have since widened to over 1,200 basis points, and credit default swaps (CDS), an instrument used by investors to manage risk, now price in a 55% possibility that Cairo defaults on a payment.
However, according to Francesc Balcells, CIO of emerging debt at FIM Partners, around half of the $100 billion Egypt has to pay by 2027 would go to the IMF or bilateral deals, mostly in the Gulf. Egypt “should be able to pay under normal circumstances”, he added.
Trust levels plummeted after bitcoin was made legal tender and the door closed on IMF hopes. Investor confidence has plummeted to the point that an $800 million six-month bond is trading at a 30% discount and longer-dated bonds at a 70% discount.
Ethiopia (Reuters chart: Africa’s debt problems)
Ethiopia is a financial powerhouse in East Africa and has experienced great economic expansion in recent years. Addis Ababa, the national capital, is ranked as the eighth richest city in Africa and one of the richest on the continent.
But one of the first nations to receive debt relief under the G20 Common Framework program will be Addis Ababa. Although the country’s protracted civil war has slowed progress, it is still paying interest on its only $1 billion international bond.
Ghana (Reuters chart: How not to spend it)
Rampant borrowing has caused Ghana’s debt-to-GDP ratio to rise to almost 85%. It has already spent more than half of its tax revenue to pay interest on its debt, and its currency, the cedi, has lost about a quarter of its value this year. Moreover, inflation has increased by a third.
Kenya (Reuters chart: Kenya worries)
About 30% of Kenya’s revenue is used to pay interest on loans. Given that it no longer has access to funding markets and has bonds worth over half a billion dollars maturing in 2024, this is problematic.
“These countries are the most vulnerable just because of the amount of debt coming due relative to reserves and fiscal issues in terms of stabilizing the debt burden,” Moody’s David Rogovic said of Kenya, the United States. Egypt, Tunisia and Ghana.
The spread on Nigeria bonds is currently just over 1,000 basis points. Still, the country’s reserves, which have been rising steadily since June, should comfortably cover the country’s next $500 million bond payment in a year. However, the government devotes nearly 30% of its revenue to servicing the debt.
Brett Diment, head of emerging market debt at investment firm abrdn, said: “I think the market is overpricing a lot of these risks.”
Pakistan (Reuters chart: countries in debt distress at record high)
Last week, Pakistan concluded an important agreement with the IMF. The discovery could not have come at a better time, as rising energy import costs put the country at risk of a balance of payments crisis.
The country’s foreign exchange reserves have fallen to just $9.8 billion, just enough for five weeks of imports. The Pakistani rupee has fallen to record lows, and more pain awaits as the dollar rises. With the incoming administration spending 40% of its income on interest payments, spending cuts are now urgently needed.
Tunisia (Reuters chart: African bonds suffer)
Africa has several IMF candidate countries, but Tunisia seems to be among the most vulnerable.
Due to President Kais Saied’s efforts to consolidate his grip on power and the country’s strong and stubborn trade union, the country has a budget deficit of almost 10%, one of the highest public sector wage bills in the world. . Some fear that it will be difficult to obtain or join an IMF program.
Demand from premium investors to buy Tunisian debt over US bonds rose to nearly 2,800 basis points, putting the country alongside El Salvador and Ukraine among Morgan Stanley’s top three most likely defaulters. . Tunisia’s central bank boss Marouan Abassi said a deal with the IMF was now needed.
Ukraine (Reuters chart: Ukraine bonds brace for default)
Ukrainian currency hyrvnia is down more than 5% against the dollar. Due to the Russian invasion, big investors like Morgan Stanley and Amundi are warning that Ukraine will almost surely have to restructure its debt by $20 billion or more.
The deadline is September when bond payments totaling $1.2 billion are due. Kyiv may be able to make payments from reserves and aid money. However, investors believe the government will follow suit in light of state-owned Naftogaz’s request for a two-year debt freeze this week.
As the dollar rages, few dare to stand in its way
On the Greek side, what surprised more than one was the magnitude of the strength of the dollar. Still, the dollar’s momentum made investors hesitant to stand in its way.
“Almost all currencies look attractive against the dollar over the longer term, but investors need to ask themselves…what happens if you take a position and the dollar continues to strengthen?” Brian Rose, senior economist at UBS Global Wealth Management, told Reuters.
While recession fears have risen as the Federal Reserve is on an aggressive policy tightening trajectory, the economic outlook for many others looks even bleaker, further bolstering dollar strength.
“The USD remains the king of FX and it would be incredibly brave and naïve to assume otherwise,” noted analysts at TD Securities.
What this surge in the dollar has done is cause other countries’ foreign exchange reserves to fall sharply, due to the billions of dollars sold in market interventions causing their currencies to drop significantly.