The World Bank has recently expressed concerns regarding the increased borrowing costs for developing nations, emphasizing the need for these countries to accelerate their economic growth amidst challenging conditions.
This alert comes at a time when emerging market governments have reached a record high in international bond sales, totaling $47 billion in January alone. The sales are predominantly led by comparatively less risky economies like Saudi Arabia, Mexico, and Romania as reported by Reuters.
In contrast, some emerging markets perceived as having higher risk are beginning to access the markets but at steeper interest rates. A prime example is Kenya, which had to pay over 10% interest on a new international bond. This rate is often seen as a benchmark, beyond which borrowing costs are generally considered unsustainable.
Ayhan Kose, the deputy chief economist at the World Bank, highlighted in a Reuters interview in London that the dynamics of borrowing have fundamentally shifted. He likened the situation to having a mortgage at a 10% interest rate, which would be a cause for concern. Kose stressed that achieving a growth rate that surpasses the real cost of borrowing is critical yet challenging.
Further complicating the situation is the recent data from the Institute of International Finance, which revealed a record global debt level of $313 trillion in 2023. Additionally, the debt-to-GDP ratio in emerging economies has reached new heights, signaling potential future financial difficulties.
The World Bank's Global Economic Prospects report, published in January, forecasted a bleak outlook for the global economy. It predicted the weakest performance in three decades for the 2020-2024 period, even if a recession is averted.
Global growth is expected to decelerate for the third consecutive year to 2.4%, with a slight increase to 2.7% projected for 2025. These figures are significantly lower than the 3.1% average growth rate of the 2010s.
Emerging economies are particularly affected by this slowdown. Approximately a third of these countries have not recovered from the COVID-19 pandemic, with per capita incomes still below 2019 levels. Kose voiced concerns that this situation might jeopardize numerous objectives in areas like education, health, and climate change.
The ongoing Middle East conflict poses an additional risk, alongside the challenges posed by stringent monetary policies and weakened global trade. Kose emphasized the critical role of trade in reducing poverty and providing earnings for emerging market economies.
If growth continues to stagnate, Kose warned that some emerging economies might need to restructure their debts. This could involve altering debt maturities or negotiating reductions with creditors. He underscored the necessity of a restructuring framework, which has not materialized as hoped by the global community.
The G20 nations introduced the Common Framework in 2020 to facilitate and expedite the financial recovery of debt-distressed countries affected by the pandemic. However, this initiative has encountered delays, exemplified by Zambia’s prolonged default, now exceeding three years.
Kose concluded that without robust growth and favorable financing conditions, navigating out of these challenges will be difficult. Conversely, a surge in growth could serve as a crucial remedy for these issues.
22.02.2024
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