Global economy: growing list of developing countries vulnerable to default due to rising inflation


New economic data paints a grim picture of the state of the world, with a top economist warning some countries: debt crises are “almost already here”.

The number of emerging markets in the world where investors believe that default is a real possibility or is already in default has more than doubled in the past six months, to 19 countries.

Bloomberg Economics data paints a grim picture as global interest rate hikes and inflation take their toll.

In fact, one of the hardest hit countries is predicted to hit an inflation rate of as much as 60 percent.

El Salvador, Ghana, Tunisia, Pakistan and Egypt are the countries most vulnerable to default.

Sri Lanka defaulted on its foreign debt for the first time in its history last month.

The country of 22 million people is grappling with an economic crisis and the government has run out of foreign currency to import critical items, with dire shortages of essentials and devastating power cuts quickly becoming the norm, with schools closed and workers ordered to work from home. to work.

Sri Lankan Prime Minister Ranil Wickremesinghe said inflation would rise to 60 percent by the end of the year.

Carmen Reinhart, chief economist at the World Bank, said inflation is a regressive tax that “affects the poorest countries and the poorest households.”

“The list of countries facing indebtedness or high risk of debt is growing rapidly,” she said Bloomberg Daybreak: Australia last week.

“The rise in US interest rates, China, which has been a major lender, has scaled back credit lately, and of course we have the uncertainty that the environmental risk we’ve had during the low interest rate environment may turn into a more permanent one. or long-term risk reduction, which covers emerging markets. All of these things add up to the debt risks.

“In low-income countries, debt risks and debt crises are not hypothetical. We’re almost there already.

“It’s just that the countries are small and don’t make the headlines… like the big emerging markets do.”

Bloomberg has reported $237 billion ($A347 billion) at stake because of foreign bondholders in distress-traded bonds — nearly one-fifth of the $1.4 trillion ($A2 trillion) emerging market government bonds outstanding ​in external debt denominated in dollars, euros or yen.

Emerging markets debt levels rose during the pandemic.

A sovereign default is when the government of a country fails to repay its debt in full when it is due.

When a country defaults on its debts, the entire economy takes a hit – as seen in Sri Lanka.

Like Sri Lanka, Russia defaulted this year as bondholders failed to receive $100 million ($A146 million) in interest payments last month.

However, Russia called it a “farce” and insisted it had the means to pay the country’s debt, but Western sanctions had created “artificial obstacles”.

Unprecedented Western sanctions that have increasingly isolated Russia from the global financial system after the invasion of Ukraine.

Volatile commodity prices have been exacerbated by the war, as countries have banned the purchase of Russian oil and gas, among other things.

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