January 2019
THINGS
TO WATCH IN 2019: DEBT AND EMERGING DEBT CRISES
A
look at the key crises that are threatening economies around the globe,
and which countries are likely to be hit hardest this year.
By
Bodo Ellmers
More than a decade after the last global financial crisis hit, the
next wave of defaults is lapping at our shores. Financing conditions
will become more difficult in 2019. The world’s major central banks
‘normalised’ their monetary policies last year, meaning that the times
of cheap and abundant credit are over.
Both public and private actors that borrowed heavily in
recent years are finding it increasingly hard and costly to refinance
their sky-high debt stocks. The number of countries at high risk of
debt distress is increasing. In this overview of 2019, we look at
the key crises that are threatening economies around the globe, and
which countries are likely to be hit hardest…
An end to quantitative easing in Europe
The European Central Bank (ECB) fterminated its net asset purchase programmes in December. Through these programmes,
the ECB had helped Eurozone countries to issue and refinance debts
at low interest rates since 2015. As a result, the ECB became the
largest creditor in the EU, holding more than €2 trillion in government
bonds. Despite the ECB’s announced it would keep interest rates low
at zero per cent, the end of net asset purchases marks the end of
quantitative easing in Europe.
This policy shift comes at an awkward time as Gross Domestic
Product (GDP) growth in the EU dropped dramatically to just 0.3 per
cent in the penultimate quarter of 2018. Major economies like Italy
and even Germany showed negative growth. Moreover, shocks through
a hard Brexit, Trump-style trade wars, a waning China boom and other
factors are likely to hit Europe hard in 2019. The shift in ECB policy
has implications for financing conditions outside Europe too, as the
liquidity created by the ECB’s quantitative easing programmes had
also made borrowing elsewhere easier and cheaper.
Cost of dollar debt rising
The USA is several steps ahead when it comes to ending
quantitative easing. The US Federal Reserve Bank (Fed) raised interest rates in
December to 2.5 per cent, the ninth such move since late 2015. Dollar
debt has thus become expensive, which is particularly problematic
for public and private debtors in developing countries that took out
dollar-denominated loans when they were still cheap and easy to find.
This is no longer the case and, according to the Fed’s announcements,
2019 will see at least two more interest rate hikes.
Jubilee Debt Campaign UK recently found that yields on low
and lower middle-income government debt increased by an average of
2.2 percentage points over the course of 2018 – reaching a staggering
annualised rate of 8 per cent by the turn of the year. 2019 will likely
see several developing countries default or – if they don’t – amassing
higher debt servicing costs that represent a massive diversion of
scarce public resources for the benefit of creditors and to the detriment
of development spending and public service provision.
Global
debt has reached record highs and is growing further
When the last global financial crisis hit, the total debt
of advanced economies had reached ‘only’ 233 per cent of GDP. By the
end of 2017, this figure was 269 per cent. Even more drastic was the
increase in emerging economies, where total debt surged from 113 per
cent in 2007 to 176 per cent of GDP in 2017, according to data from
the Bank for International
Settlements. Particularly worrying is the drastic rise of
corporate debt in both rich and not-so-rich countries, but particularly
in China.
Countries to watch
While the risk of crises is generally increasing,
some countries face particular challenges. According to the IMF debt sustainability assessments, 32 low-income countries
were in debt crises or at high risk of crisis by the end 2018. Newcomers
to the list include Republic of Congo, Ethiopia and Sierra Leone.
The troubles in Argentina, Pakistan and Turkey were the first signs of the upcoming
emerging markets crisis caused by overlending of private or official
lenders.
Here are some more countries to watch in 2019:
- Angola: Public sector debt reached 81 per cent of GDP by the end
of 2018, according to the rating agency Fitch. The
International Monetary Fund (IMF) already approved a $3.7 billion
three-year bailout loan. Angola is one example among many oil exporting
nations affected by the drop in oil prices.
-
Pakistan: Country coffers need approximately $12 billion for balance
of payments support by the end of June. Pakistan already secured $6
billion from Saudi Arabia and almost the same amount from China and
the United Arab Emirates together. It is still negotiating with the
IMF for more money, but is unwilling to bow to IMF’s conditions, according to the Committee for the Abolition of Illegitimate Debt
(CADTM) in Pakistan. China has lent massively to Pakistan to finance
projects under the Belt-and-Road-Initiative. Multilateral development
banks are also high on the creditor list.
- Sri Lanka: The island nation is a struggling with a crisis caused
by Chinese infrastructure loans, which added to an already large stock
of debt from private sources, in combination with massive capital
outflows. New measures to cope with volatility include restricting
foreign ownership of debt, says Reuters.
- Ukraine: As the conflict continues, Ukraine has just signed a new Stand-By Agreement with the IMF and continues to be by far
the largest recipient of Macrofinancial Assistance from the EU.
-
South Africa: Faces a $170 billion foreign debt cliff and already
pays a staggering 9 per cent yield on 10-year-bonds to attract investors, according to Professor Patrick Bond.
- Venezuela: Has already defaulted on a number of bonds and faces litigation by vulture funds. It can hardly restructure
old debts while still under US sanctions that prevent foreign creditors
from taking on new bonds.
- Cuba: Following the lead of Venezuela and Mozambique, Cuba made
the incoming Brazilian President a welcome gift by defaulting on loans due to Brazil’s national development bank.
-
Gambia: Also trying
to restructure unsustainable and illegitimate debts, Gambia has
just hired the Potomac group to help the country out of a debt crises
that occurred when the previous president plundered state-owned enterprises.
- China: The elephant in the room, total debt in China has more than
quadrupled since 2007, rising to 317 per cent of GDP. Corporate debt
accounts for more than half of this, standing at 170 per cent of GDP
in 2015. This is more than double the average ratio in advanced economies,
according to an analysis
by the CADTM.
- Italy: The EU’s very own elephant in the room is Italy. Risk premiums
on Italian bonds have fallen substantially since November,
but everyone wonders how the end of quantitative easing and potentially
rising interest rates might impact on Italy’s debt sustainability.
- Uganda: An interesting case as it proves that debts can cause humanitarian
crises. While rated at ‘low risk of debt distress’ by the IMF, the
Ugandan government will have to use more than half of government revenues
in the coming years to pay debts, according to the Auditor General.
With so many crises ongoing and more expected to emerge, it is no
surprise that the topic is high up the agenda of international organisations
for 2019. The global policy-making calendar offers a number of opportunities
to take bold steps that could turn the tide and stop these potential
crises from escalating any further. – Third World Network Features.
-ends-
About
the author: Bodo Ellmers leads Eurodad’s work on debt, financial governance
and responsible financing.
The
above article is reproduced from Eurodad.org, 17 January 2019. Read
the next
blog to find out more about key moments on the 2019 calendar.
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