Emerging market debt has become two-fold in the last 10 years, reaching 29 trillion.
Developing countries, already facing a challenge for 2025, manage increasing interest rates on $29 trillion in debt built up over the past decade.
As reported by the United Nations, around 54 countries use 10% of their revenue on interest payments. Some countries, like Pakistan and Nigeria, spend more than 30% of revenue to meet interest obligations.
It equals $850 billion for domestic and international debt, which forced countries to redirect funds from hospitals, infrastructure, and schools while increasing risks for investors in emerging markets.
It is an additional challenge during a year of uncertainty for emerging markets. Donald Trump‘s influence on the US interest rate, increasing geopolitical tensions, and concerns about the Chinese economy all create a bumpy road for 2025.
Investors have started withdrawing funds, with outflows from hard currency market debt of more than 14 billion this year, based on EPFR data by Morgan Stanley.
Despite that, the government has avoided any sovereign defaults in 2024. RBC BlueBay Asset Management and Morgan Stanley analysts do not predict any countries facing bankruptcy since the IMF has intervened and reopened the international capital market for some borrowers.
Debt talks that have been on hold for many years have been resolved due to the backdrop. Some of the riskiest bonds in the world, like Egypt and Pakistan, have outperformed their peers, and some countries are trading near distressed levels.
Debt negotiations that were postponed for many years were resolved due to this favorable environment, but as the borrowings made during the pandemic mature and interest costs build, money managers are questioning the period for this calm environment.
Emerging market debt has become twice more in the last 10 years, reaching 29 trillion, with most coming from local borrowing, according to UNCTAD’s annual debt report.
So, the countries are dealing with heavy interest rates and bond maturities that need to be paid or refinanced. As indicated by JPMorgan Chase & Co., about 190 billion in foreign bonds will be due in the next two years.
Some riskiest countries offer 9% coupons to access the international debt markets and refinance their debts. Reports at S&P analysts anticipate higher defaults in the next decade due to high debt levels and increased borrowing costs.
The World Bank recently stated that low-income countries face high-interest payments.
The possibility of a new round of defaults highlights the risky situation for emerging market debt investors, who have faced significant losses after a series of defaults after the pandemic.
Ethiopia was the latest developing country to fail to repay debt in late 2023.
There is increased pressure on the International Monetary Fund (IMF) to step in for support. The organization is currently negotiating with Argentina, one of its biggest debtors, to get a deal by the end of the year to replace and potentially expand the current 44 billion deal.
Argentina has defaulted a staggering nine times and faces a burden of approximately $9 billion due between interest and principal payments on its challenging currency bonds next year.
In Asia, the IMF has already committed to helping Sri Lanka and Pakistan to dramatically increase the debt of those countries by 34% and 43% this year.
In October, Angolan suggested initiating discussions with the IMF for a new program but later said that for now, the Fund will continue to provide technical support.
About 27% of an emerging market index is currently engaged with the IMF, and analysts from Morgan Stanley, including Emma Cerda and Simon Waever, predict that the number of countries depending on the Fund’s program would increase more.
Morgan Stanley strategists wrote in a note on December 3 that the International Monetary Fund will still play a significant role. Due to financial concerns, they believe that a majority of the portion of incoming programs that end will get refinanced.
