Intermoney | In the first nine months of the year, according to the Institute of International Finance (IIF), which represents a sort of international banking association, global debt has increased by $15 trillion and is likely to exceed $277 trillion by 2020.
So at the end of this year, world debt would amount to 365% of GDP, compared to 320% at end-2019, along with the high figures in developed countries which are only possible due to the role of last resort lender of their central banks. In fact, over the year to Q3’20, the IIF estimates that the debt of advanced economies increased by 50 percentage points to 432% of GDP. However, this increase was not evenly distributed, with half of it explained by the US where total debt stood at $80 trillion versus $71 trillion at end-2019.
The other big country leading the very strong increase in debt was China, due to the increase in the burdens of non-financial companies. This caused total emerging debt to increase to $76 trillion in Q3’20. This situation contrasted with the decrease in the dollar debt of the emerging countries as a whole, once the figures from China were excluded. That said, this was not such positive news since the depreciation of many emerging countries’ currencies was key to explaining the drop in the amount of their obligations translated into dollars.
The debt burden in China is almost secondary when this country managed to finance itself at negative rates in euros last week. In addition, the dynamism of its growth and the strength of its institutional system, including the central bank, minimize any risk scenario. So what worries us is the rest of the emerging countries whose situation is more complicated. And this helps explain why the debt of the emerging world is projected to increase by 26 percentage points in 2020 up until the end of the year, nearing 250% of GDP.
For the time being, Ecuador and Argentina have already carried out important debt restructuring this year. But in the latter’s case, their problems are far from over. Analysts flag that Argentina’s international reserves are close to zero and this will force it to strengthen capital controls (close to 39 billion $ in gross terms). But it will also allow for a greater depreciation of the Argentinean peso which is deteriorating rapidly and is trading at historical maximums of 80.36 units per dollar. The question is how far the Argentine peso could fall and the answer is much more, if we take into account that in the black market it is priced at around 160 units per dollar and there is little confidence in the government’s economic policies. For the time being, the easy way out of debt monetisation would only increase visible problems in inflation rates a little less than 40% yearly.
However, the problems are not only in Latin America. The list of developing countries facing debt stress was officially expanded to include Zambia, the sixth developing nation to default on or restructure its debt by 2020. Unfortunately, Zambia was the first African country to make its problems official, but it will not be the last. Zambia’s default is the advance confirmation of the significant deterioration of public finances that is to come. Before the COVID-19 crisis, 40% of the countries in Sub-Saharan Africa were at risk of debt stress
The point is that without credible central banks to support these nations, the only solution lies in the haircuts from their creditors, not even a moratorium on payments.
In fact, Zambia’s default situation can quickly be extended to Ghana and Angola. And outside the African continent, Sri Lanka and Lebanon, amongst other countries, can be added to the list.
Many emerging and developing countries, then, are heading for another lost decade like the one experienced in the 1980s. The decisive bet on debt reduction would definitively punish growth. But so would the failure to do so in the medium term, while the monetisation of the debt would lead to even more unsustainable rates of inflation.
China has become a key player amongst the creditors of the most disadvantaged nations. However, the lack of clarity over Zambia’s obligations to this Asian nation is becoming a key obstacle for the rest of the creditors. In total, according to Johns Hopkins University, China has lent $143 billion to African countries in 2000-2007, through its banks, companies and government facilities. In fact, one third of the $30.5 billion that low-income sub-Saharan countries face in debt service payments in 2021 comes from China’s official creditors. And a further 10% from the China Development Bank.
Many African nations need haicuts, but also the reinforcement of medium-term financing in order not to restrict their development possibilities. Specifically, the IMF estimates that $410 billion is needed for Africa over the next 3 years to close its external financing gap. In fact, the World Bank warns that without decisive support in the form of structural debt relief, we will face an increase in poverty and a repetition of the disorderly defaults of the 1980s in many low-income nations.
So then we may see a re-edition of the lost decade which affected many Latin American nations at the end of the last century, resulting in growth deficits and increased poverty. The mistakes of the past can be repeated, although this time led by China. It holds 63 percent of the $178 billion in bilateral debt owed by the developing countries to the G-20 in 2019. Once again, the problem is that creditors will end up prioritising their collections and immediately impose a fiscal consolidation. This will take its toll on the growth of many countries which are in a complicated situation.
The debt burden will not only weigh heavily on the future of many developing countries, but on many other nations as well. Between Q3’20 and end-2021, emerging countries will face debt payments of $7 trillion, 15% of which will be in dollars. In addition, between 2016 and the last quarter, global debt increased by $52 trillion compared to a $6 trillion rise between 2012 and 2016. In other words, in all respects we live in a world flooded with debt and this is a major risk that we should not ignore.