In default zone

ByUmair Ali

Trainee lawyer


July 28, 2022

Umair Ali looks at a harrowing situation

Financial crunch is now a global issue and many countries have almost reached the tipping point with strong possibilities that they will fall over the other side. The credible signs of debt crisis are now prominently on display including currencies fast losing their value, large margins of spreads on bonds and fast dwindling foreign exchange reserves that are strongly pointing towards the fact that many developing economies are now in real trouble with looming default on the horizon. The figures are very depressing indeed as 1,000 basis points spread indicate that something like $400 billion of debt is in play out of which Argentina has by far the most at over $150 billion while the next in line are Ecuador and Egypt with $40 billion-$45 billion among them, respectively. There is a glimmer of hope however that many developing economies may somehow avoid prospects of default but this possibility is heavily dependent upon the calm behaviour of global stock markets and enhanced financial involvement and support. Though these variables are much in evidence yet how much would they be effective is required to be seen.

It is, however, suspected that many countries are very much in the danger zone such as Argentina that is already known as the record holder of sovereign default and looks likely to repeat such performance. Its currency, peso, is now trading at a near 50 per cent discount in the black market and its reserves are critically low with bonds trading at just 20 cents in the dollar that is registered as less than half of what they were after the country’s 2020 debt restructuring. The situation is that the government does not have any substantial debt to service until 2024 but it ramps up after that and concerns have crept in that the country may push to renege on the International Monetary Fund.

Ukraine is another country in the default line as the Russian invasion means Ukraine will almost certainly have to restructure its more than $20 billion debt. The crunch comes in September when $1.2 billion of bond payments are due but the perception is that the current flow of aid and reserves mean that the country may be able to pay. However, another situation has crept up with state-run Naftogaz asking for a two-year debt freeze that has made the investors to suspect that the government may soon follow suit. Western sanctions wrestled Russia into default last month and Belarus is now facing the same tough treatment having stood with Moscow in the Ukraine campaign.

Though many countries in Africa are engaged with IMF but Tunisia amongst them looks more vulnerable. A near 10 per cent budget deficit and one of the highest public sector wage bills in the world there are concerns that securing, or at least sticking to, an IMF programme may be tough. The situation is exacerbated by the fact that incumbent President Kais Saied is trying to hog all power as well as over the tough labour union. Tunisian bond spreads have risen to over 2,800 basis points and along with Ukraine and El Salvador, Tunisia is considered to be in the top three of likely defaulters. Intense borrowing by Ghana has seen Ghana’s debt-to-GDP ratio soar to almost 85 per cent with cedi, its currency, has lost nearly a quarter of its value this year and it was already spending over half of tax revenues on debt interest payments. Moreover, inflation is also getting close to 30 per cent.

Pakistan struck a crucial IMF deal this week and this breakthrough could not be more timely, with high energy import prices pushing the country to the brink of a balance of payments crisis. Foreign currency reserves have fallen to as low as $9.8 billion, hardly enough for five weeks of imports. The Pakistani rupee has weakened to record lows. The new government needs to cut spending rapidly now as it spends 40 per cent of its revenues on interest payments.

Egypt is running close to 95 per cent debt-to-GDP ratio and has seen one of the biggest exoduses of international cash this year rated to be some $11 billion. It is also estimated that Egypt has $100 billion of hard currency debt to pay over the next five years, including a meaty $3.3 billion bond in 2024. Egypt, devalued the pound 15 per cent and asked the IMF for help in March but bond spreads are now over 1,200 basis points and credit default swaps known as an investor tool to hedge risk, price in a 55 per cent chance it fails on a payment. The country is required to pay roughly half the $100 billion to IMF by 2027 or bilateral payment mainly to Gulf countries.

Kenya spends roughly 30 per cent of revenues on interest payments. Its bonds have lost almost half their value and it currently has no access to capital markets and the problem is with a $2 billion dollar bond coming due in 2024. Ethiopia plans to be one of the first countries to get debt relief under the G20 Common Framework programme. Progress has been held up by the country’s ongoing civil war though in the meantime it continues to service its sole $1 billion international bond. TW


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