When Ghana suspended interest payments on most of its external debts this month, it was the national equivalent of someone not making the minimum payment on their credit card.
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But that was then. Now, Ghana has been locked out of the international markets where countries go to raise money from investors, its credit card effectively frozen.
It is a crisis that has been in the making for years: the latest in a series of so-called debt bombs that have pummeled nations around the world.
Throw in the effect of the war in Ukraine, which has fanned global food and fuel prices, driving up the cost of living internationally, and the world is left facing the very real prospect of a series of economic explosions that could affect the lives of tens of millions of its poorest people.
This is why Sri Lanka — which earlier this year saw its government implode following a wholesale economic collapse — was seen by many experts as a warning signal.
It is also why the news from Ghana “did not come as a surprise,” as Francesc Balcells, an expert on debt in emerging markets at the London-based investment firm FIM Partners, told Grid.
“It was pretty clear that their debt was unsustainable,” he said. “One very clear indicator for example was how much of their revenue they spending servicing their debt — the number was staggeringly high.”
A case of exploding balance sheets
So then who comes next? Which countries, in other words, are most vulnerable to Sri Lanka- and Ghana-style financial nightmares?
The comparable figure for Sri Lanka is over 100 percent. After Ghana, next in line is Pakistan, which is spending just over 41 percent of its revenues on interest payments; Egypt is in an identical predicament. Pakistan is already reliant on IMF support; ditto for Egypt. The support has been critical to the countries avoiding catastrophic defaults.
Still, not all indebted emerging economies are the same, as Balcells, from FIM, told Grid.
“When you think of emerging markets — when you think about the traditional countries like Mexico, South Africa, India, Brazil and others — those guys are fine,” he explained. Their economic systems, he said, have developed over the years in a way that makes it possible for them to deal with current global economic pressures.
But there is a subset, “maybe 10 percent of the emerging market universe,” where the picture is different. “A lot of it is in Africa,” Balcells said. It is not limited to the continent, however; the risks extend far beyond to countries such as Pakistan.
Beyond the markets
And as Ghana’s example shows, the pressures these countries face matter well beyond the financial markets.
In Pakistan, similar pressures have led to calls for its creditors to cancel the nation’s debts, particularly in the aftermath of the recent flooding that devastated the country.
The worry raised by Jarwar — that Pakistan’s debt load would affect critical development work — was echoed in October by the U.N., which identified 54 developing countries with “severe debt problems.” This included 28 countries that the U.N. said were among the 50 nations most vulnerable to climate change.
All told, those with the worst debt problems accounted for only around 3 percent of the global economy. But that understates the problem.
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