This could be even trickier to resolve than in the pastby Paul Wallace / March 29, 2018 / Leave a comment
Over the past few years debt crises have struck in unfamiliar places—in developed rather than developing economies. In 2012 Greece became the first advanced country to restructure its debt in more than half a century (ironically, the preceding example in 1953 was Germany, the Greeks’ scourge). Four other countries on the periphery of the eurozone avoided defaulting on their debt but required bailouts as they lost access to sovereign bond markets. But as Greece looks set later this year to exit its third rescue programme since 2010 there are mounting worries that a new debt crisis may be looming in the more familiar setting of poor economies. Earlier this month the International Monetary Fund made clear its concerns.
Until recently such fears were receding rather than intensifying for poor countries, a group of around 60 economies whose income per person is below the emerging-market threshold, and which make up a fifth of the world’s population but only 4 per cent of global output. The first decade or so of the 21st century was benign for these countries as far as debt was concerned. Public debt for the typical (median) economy in this group fell from 94 per cent of GDP in 2001 to around 33 per cent at the start of this decade. A big debt relief programme launched in 1996 by the IMF and World Bank (and enhanced in 2005), helping over 30 highly indebted poor countries mostly in Africa, contributed to the improvement. So did robust growth ahead of the financial crisis and the continuing strength of emerging economies—notably China—after the crisis.
But since 2013 there has been an unwelcome return to the future. Public debt for the typical poor country rose from the low of 33 per cent to 47 per cent of GDP by the end of 2017. That might sound manageable given levels of around 90 per cent of GDP in Britain and the euro area and close to 110 per cent in the United States (despite its restructuring Greek public debt remains intolerably high, at 180 per cent). But a country’s capacity to borrow depends upon its level of development. The threshold at which debt becomes potentially unsustainable is considerably lower for poor economies, which raise much less revenue as a share of their GDP than richer ones.
According to the IMF, there are now 24 that are either failing to service their debt such as Mozambique (whose public debt jumped from 53 per cent of GDP in 2013 to 128 per cent at the end of 2016) or at high risk of falling into such “distress” (such as Zambia). In 2013 there were only 13. Most of the countries that have got into difficulties in the past few years are in sub-Saharan Africa.
The deterioration has occurred for a variety of reasons. The steep fall in commodity prices from mid-2014 and only partial pick-up since the trough of 2016 hurt exporters—such as Nigeria for oil and Zambia for copper—which had flourished in the long upswing of the “commodity supercycle.” Interest payments have risen, especially in “frontier” economies such as Ghana that are able to access private capital markets. In all, budget deficits have deteriorated in 40 of the poor economies. In close to half of such cases investment has fallen rather than risen.
“Most of the countries that have got into difficulties in the past few years are in sub-Saharan Africa”
The widespread worsening in deficits and debt reflects a general relaxation on former constraints. The traditional creditors—multilateral lenders such as the World Bank and western countries—no longer hold sway. Poor economies have been able to play the strategic card as China in particular has increased its presence as a lender. Some of them—the “frontier” economies of interest to venturesome investors—have also been able to take advantage of the hunt for yield among investors by raising private funds in the capital markets.
The strengthening global economy may help to contain debt pressures in the immediate future. But prospects are blighted in particular for states where institutions are weak—and especially if they are in areas of the world where conflict is rife. Debt has shot up for example in Yemen.
If a renewed debt crisis does break out it may prove even trickier to resolve than in the past. For one thing there may be less appetite to write off debt as sceptics point to countries that have run into renewed difficulties after receiving previous relief. The increasing diversity of sources of finance may also make it harder to reduce excessive debt through deals among western official lenders co-ordinated at the “Paris Club” (of which China is not a member). Meanwhile countries that have borrowed from private markets may get trapped in the kind of prolonged imbroglio that Argentina has experienced since defaulting on its debt at the end of 2001.
Once again the painful lesson will have to be learned: that it is much easier to run up debt than to deal with the burden once it has accumulated. Unfortunately the world’s poorest inhabitants will pay the price.