A pounding dollar on the purchasing power of most currencies, crushing two-decade highs in international markets, fears of an economic slowdown and charred foreign exchange reserves indicate that a record number of developing countries are now in dire straits.
According to Reuters, a record number of developing countries are currently in trouble as many countries are exhibiting economic malaise similar to Sri Lanka, including typical debt crises, signs of currencies collapsing, 1,000 basis point bond spreads and FX reserves . Check out the list below.
With rising borrowing prices, inflation, and debt all fueling concerns of economic collapse, the analysis shows that Sri Lanka, Lebanon, Russia, Suriname and Zambia are already in debt default, Belarus on the verge of default, and At least another dozen countries are in danger of default.
The overall price is shocking. Analysts estimate that $400 billion of debt is at risk using 1,000 basis point bond spreads as the pain threshold. Argentina is the largest with more than $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 against the dollar this year, which many market experts say is due to capital controls.
Investors have been questioning how long the dollar rally can last, but many are waiting for a bearish dollar on the dollar before doing so. Compared to a basket of competitors, the dollar has risen nearly 13 percent this year to a two-decade high.
It’s on track to have its best year since 1997, thanks to an upbeat Federal Reserve and investors seeking protection from an uncertain global economy. (Reuters Graphic: Money Market in 2022)
See below a list of countries at risk based on the Reuters report:
Argentina(Reuters Graphic: The pain has spread)
The world leader in sovereign default appears certain to increase its total. In the illiquid market, the peso is currently trading at a discount of about 50 percent, reserves are at an all-time low, and bonds are now worth 20 cents on the dollar, half their post-2020 debt restructuring value. less than .
Although the government won’t have much debt to pay off until 2024, it will begin to pile up, and there are growing fears that strongman Vice President Cristina Fernández de Kirchner will force Argentina to break its commitment to the International Monetary Fund. You can try to force.
Belarus ,Reuters Graphic: Belarus Bond,
After standing with Moscow in the Ukraine campaign, Belarus is now subject to the same harsh penalties that forced Russia to default last month.
The Latin American nation went into lapse only two years ago, but violent protests and attempts to oust President Guillermo Lasso have thrown it into turmoil.
It’s a huge debt, and JPMorgan forecasts a fiscal deficit for the public sector at 2.4 percent of GDP this year and 2.1 percent of GDP next year as the government subsidizes food and fuel. The spread on the bond has crossed 1,500 bps.
Egypt ,Reuters Graphic: Egypt’s falling forex reserves,
With a debt-to-GDP ratio of nearly 95%, Egypt has experienced one of the largest outflows of foreign funds this year, JPMorgan estimates, totaling around $11 billion.
According to fund management firm FIM Partners, Egypt is expected to pay off $100 billion in hard currency debt over the next five years, including a larger $3.3 billion bond in 2024.
Cairo reduced the value of the pound by 15 percent and requested assistance from the IMF in March. Still, bond spreads have exceeded 1,200 basis points, and credit default swaps (CDS), a tool used by investors to manage risk, now have a 55 percent chance that Cairo will default on payments. .
However, according to Francesc Balcells, CIO of EM loans at FIM Partners, Egypt will have to pay $100 billion by 2027, about half of which will go to the IMF or bilateral agreements, mostly in the Gulf. Egypt “should be able to pay under normal circumstances,” he said.
Trust levels plummeted after bitcoin was made legal tender and the IMF’s expectations closed the doors. Investor confidence has plummeted to the point that an $800 million bond with a six-month maturity trades at a 30 percent discount and a longer-term bond at a 70 percent discount.
Ethiopia ,Reuters graphic: Africa’s debt problems,
Ethiopia is a financial superpower in East Africa and has seen a great economic expansion in recent years. The country’s capital, Addis Abeba, is ranked as the eighth richest city in Africa and one of the richest cities on the continent.
But Addis Abeba will be one of the first countries to get debt relief under the G20 Common Framework Program. Although the country’s prolonged civil war has slowed progress, it is still paying interest on its $1 billion international bonds.
Ghana ,Reuters Graphic: How Not to Spend It,
The frenzied borrowing has caused Ghana’s debt to GDP ratio to rise to nearly 85 percent. It has already spent more than half of its tax income on debt interest payments, and its currency, the cedi, has lost about a quarter of its value this year. Also, inflation has increased by a third.
Kenya ,Reuters graphic: Kenya’s concerns,
About 30 percent of Kenya’s earnings are spent on paying interest on loans. Since it no longer has access to financial markets and has more than half a billion dollars worth of bonds maturing in 2024, this situation is problematic.
Moody’s David Rogovich said of Kenya, Egypt, Tunisia and Ghana, “these nations as a whole are susceptible to fiscal issues in terms of the amount of incoming debt relative to reserves and stabilizing debt burdens.”
The gap on Nigerian bonds is currently a little over 1,000 bps. Still, the country’s reserves, which have been rising steadily since June, should comfortably meet the country’s next $500 million bond payment in a year. However, the government spends around 30 per cent of its income on debt servicing.
Brett Dement, head of emerging market lending at investment firm Aberdon, said: “I believe the market is eliminating many of these risks.”
Pakistan ,Reuters Graphic: Country at record high in debt crisis,
Last week, Pakistan reached an important IMF agreement. The discovery could not have come at a better time, as rising energy import costs are putting the country at risk of facing a balance of payments crisis.
The country’s foreign exchange reserves have come down to just $9.8 billion, which is enough for just five weeks of imports. The Pakistani rupee has registered a decline, and is going to hurt more with the rise of the dollar. Since the incoming administration spends 40 per cent of its revenue on interest payments, there is an urgent need to cut expenditure.
Tunisia ,Reuters graphic: African bond victims,
Many countries in Africa are applying to the IMF, but Tunisia is one of the most vulnerable.
Because of President Kais Syed’s efforts to tighten his grip on power and the country’s strong, stubborn labor union, the country’s budget deficit is nearly ten percent, one of the world’s highest public sector wage bills. There are concerns that the IMF program may be difficult to secure or adhere to.
Premium investors’ demand to buy Tunisian debt on US bonds has soared by nearly 2,800 basis points, placing the country with El Salvador and Ukraine as Morgan Stanley’s top three most likely defaulters. Tunisia’s central bank chief Maruan Abassi has said that an agreement with the IMF is now necessary.
Ukraine ,Reuters Graphic: Ukraine bond brace for default,
The Ukrainian hirvania currency is down more than 5 percent against the dollar. Because of Russia’s invasion, major investors such as Morgan Stanley and Amundi have warned that Ukraine will almost certainly need to restructure its $20 billion or more of debt.
The deadline is September when bond payments totaling $1.2 billion are due. Kyiv may be able to pay due to reserves and aid money. However, investors believe the government will follow suit this week in light of state-run Naftogaz’s request for a two-year loan freeze.
As the dollar rises, few dare stand in its way
On Greyback, what has surprised many is the extent of the dollar’s strength. Still, the dollar’s momentum has made investors hesitant to stand in its way.
“Almost any currency looks attractive against the dollar on a long-term basis, but investors have to ask themselves… what happens if you hold a position and the dollar continues to strengthen?” Brian Rose, senior economist at UBS Global Wealth Management, told Reuters.
While recession concerns have risen as the Federal Reserve embarks on an aggressively toughening policy path, for many others the economic outlook appears even more gloomy, adding to the dollar’s strength.
“The USD remains the king of FX and it would be incredibly brave and naive to assume otherwise,” noted analysts at TD Securities.
What the dollar boom has done is to rapidly deplete the foreign exchange reserves of other countries, as market intervention has led to significant depreciation in their currencies by selling billions of dollars.