The World’s Poorest Countries Buckle Under $3.5 Trillion in Debt
With about half of the world’s population living in countries that spend more on debt than on education and health care, the threat of default, and political turmoil, is growing.
In 2024 these nations, known to rich-world investors as “frontier markets,” will have to repay about $200 billion in bonds and other loans. The bonds issued by Bolivia, Ethiopia, Tunisia and a dozen other countries are either already in default or are trading at levels that suggest investors are bracing for them to miss payments.
In places such as Gabon, where President Ali Bongo Ondimba was unseated in a coup in August, tight budgets are leading to political upheaval.
Unlike the US and other countries that issue debt in their own currency, frontier countries can’t ease their burden through inflation, by printing money. They often issue debt payable in another country’s currency through eurobonds.
“This is the worst crisis in the last 30 years for these countries,” says Mattias Martinsson, partner and chief investment officer at Sweden’s Tundra Fonder AB, which manages equity funds dedicated to frontier markets.
A plan to prevent another developing-country debt crisis is now at the root of the latest financial troubles destabilizing economies from Ghana to Sri Lanka and Pakistan.
Scarred by the Latin American and Asian crises of the 1980s and 1990s, when dollar-denominated loans forced dozens of countries to default or restructure their debts, a wave of economists pushed a plan to remake low-income countries in the image of richer ones.
Instead of borrowing in dollars and falling hostage to currency swings that could make debts unpayable, governments would issue bonds in their own currencies, like the U.S. or Japan do. If a crisis hit, they could inflate their way out of trouble or change payment terms without courts in New York or London going after their assets.
It hasn’t turned out as planned. ¨
Interest payments several times higher than what they are spending on dollar-denominated borrowings are eating into investments in health, education and other areas that could help strengthen their economies.
WSJ 14 December 2023
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