Emerging Markets:  A daunting debt burden darkens the future

Emerging markets will face an immense burden to service debt that piled up while fighting COVID-19, according to the Institute of International Finance (IIF), as Covid-19 ravages fiscal balances and health systems.   EMs have other problems, too.  Once the Covid-19 scourge is past, there will be survivors and defaulters.


COVID-19 has changed the landscape for emerging markets (EM) debt, injecting a broad new dimension of pandemic-related economic uncertainty. The impact varies widely across EM countries – in many ways, the imperative to balance “lives vs. livelihoods” parallels the challenges faced by developed economies. But many EM countries with less diversified, less resilient economies also have unique problems that are exacerbated by the pandemic, especially among the poorest and most vulnerable populations.


According to Worldomoter website, among the top 20 countries with the highest number of total cases, India, Brazil, Russia, Argentina, Columbia, Mexico, Peru, Iran, Poland, South Africa, Ukraine, Chile and Iraq belogn to the Developing Nations class. Turkey would be right up there, had it not stopped reporting cases, tallying instead only actively sick patients.  So far, the world has thrown $20 trillion to combat the economic impact of the crisis, mostly by Developed Nations.  But, their generosity   helped EM deal with Covid-19, by lowering borrowing costs, pushing financial capital into their markets,  while the real economy benefited from DM demand.  With US financial support package “lost in transition” and common EU budget under veto by Poland and Hungary, fiscal support for global demand is likely to wane.


In a Nov. 18 report titled “Global Debt Monitor: Attack of the Debt Tsunami,” the Washington-based IIF said more than $15 trillion in debt across governments, firms and households were added to the global pile year to date, such that the end-September amount hit a new high of more than $272 trillion.


“As the fiscal response to the pandemic continues, we expect global debt to hit $277 trillion by end-2020,” equivalent to 365 percent of global gross domestic product (GDP), IIF said.


“While sharp economic contractions drove surging debt ratios in many cases (notably in Lebanon), the US-dollar value of debt also rose sharply in China, Egypt, Saudi Arabia, the Philippines and Turkey over the first three quarters of 2020,” the IIF noted.


The IIF said it expected “rising debt service burdens for emerging markets” despite easing policy rates, which slashed governments’ borrowing costs—“a big benefit given widespread COVID-19-related revenue losses.”


“In emerging markets, however, these revenue losses have made debt service burden much more onerous—despite the benefit from lower borrowing costs,” the IIF said.


The new generation of vaccines will soon be available in Developing World, but how much of the limited supply will make  its way to Developing Nations is a question mark. As well, can nations like India and Brazil with vast geographies and sub-tropic climates effectively vaccinate their huge populations, when the said  jabs need to  be transported in cold-storage chains?


At the end though, what makes EM  debt burden  so onerous is two fold:  First, scarring, that is the long term post-Covid economic damage which will be more severe in EM vs DM. Two, democracy. It is sad to see that almost no reference is made to a country’s progress in establishing democratic norms, institutions and rules to boost its GDP per capita growth potential.  The economics profession has long established the link between a strong democracy and faster development.


Perhaps, only those EM which manage to persevere and add to their democratic heritage will be able to pay off debt and grow at the same time.  The rest?  They could choke under the crushing debt burden they  had so foolishly taken on.


Atilla Yesilada

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.