Increased borrowing costs and the global fallout from the Russia-Ukraine war could see up to 10% of riskier ‘junk’-rated emerging market countries face debt crises in 2022, analysts at U.S. investment bank JPMorgan have cautioned.
More severe balance of payment pressures and larger fiscal deficits are now adding to problems for heavily-indebted countries that import most of their food and energy.
Sri Lanka has just gone through its first-ever sovereign default, making it to a list that already included Zambia, Lebanon, Venezuela, and Suriname. Russia and Ukraine are both wobbling too and the concern is the numbers globally will soon climb.
The note published led by strategist Trang Nguyen on May 24 Read:
“Nearly half of the (52) country sample is classified as carrying high repayment risk in our assessment. Of these, eight are at risk of reserve depletion by the end of 2023, signaling high default risks. These are Sri Lanka, Maldives, Bahamas, Belize, Senegal, Rwanda, Grenada, and Ethiopia.”
A hike in global interest rates in response to soaring inflation also means many countries are faced with the reality of increasing borrowing costs, a departure from more than a decade of so-called “easy money”.
JP Morgan’s note added:
“Accounting for risks of a potential default in Russia and restructuring in Ukraine…the EM sovereign HY default rate could reach 10% this year.”
It also indicated how Ethiopia was approaching a G20-led restructuring of its debts. The International Monetary Fund (IMF) has also said that around 60% of low-income countries are either in or at high risk of debt distress.
Analysts at investment firm Tellimer this week pointed at how a record twenty-seven emerging market countries now have Eurobond yields exceeding 10%.
Those yields are a proxy for what a government has to pay to get a loan in the international capital markets and anything exceeding 10% is generally seen as a distress signal.
JP Morgan said that in addition to the eight countries indicated as in immediate default risk, larger economies such as Pakistan, Ghana, and Egypt were also extremely vulnerable from fiscal and debt standpoints over the slightly longer term.