Developing countries need $310 billion to repay their debt in 2022 – UNCTAD – Manila Bulletin

According to the latest UNCTAD report, developing countries will need $310 billion to meet their external public debt service requirements this year, as global economic growth is expected to decline to 2.6% from 3.6 %.

UNCTAD

In an update to its Trade and Development Report released Thursday, March 25, UNCTAD said the 1% reduction in global growth is largely due to the war in Ukraine and changes in macroeconomic policies brought about by countries in recent months.

The report highlights that short-term public debt service needs are a growing concern. Developing countries are projected to need $310 billion to meet external public debt service requirements in 2022, equivalent to 9.2% of external public debt outstanding at the end of 2020.

UNCTAD said that while Russia will experience a deep recession this year, significant slowdowns in growth are expected in parts of Western Europe and Central, South and Southeast Asia.

“The ongoing war in Ukraine is likely to reinforce the trend of monetary tightening in advanced countries following similar movements that began in late 2021 in several developing countries due to inflationary pressures, with spending cuts also expected in future budgets,” said UNCTAD.

UNCTAD fears that a combination of weakening global demand, insufficient policy coordination at the international level and high debt levels due to the pandemic could generate financial shock waves that could push some developing countries into a downward spiral of insolvency, recession and stunted development.

“The economic effects of the war in Ukraine will deepen the ongoing global economic downturn and weaken the recovery from the COVID-19 pandemic,” said UNCTAD Secretary-General Rebeca Grynspan.

“Many developing countries have struggled to gain economic ground after the COVID-19 recession and are now facing strong headwinds of war. Whether this leads to unrest or not, deep social anxiety is already spreading.

Even without lasting financial market disruptions, developing economies will face severe growth constraints. During the pandemic, their stocks of public and private debt have increased. And problems that disappeared during the pandemic, including high corporate indebtedness and rising household debt in middle-income developing countries, will resurface as politics tightens.

According to the report, the war has exerted further upward pressure on international energy and commodity prices, straining household budgets and increasing production costs, while trade disruptions and the effects of sanctions may have a deterrent effect in the long term. investment.

Coming just when the pandemic-induced disruptions appeared to be easing, the geopolitical crisis dealt a blow to domestic confidence. “Additional pressure from rising prices is intensifying calls for a policy response in advanced economies, including on the fiscal front, threatening a sharper-than-expected slowdown in growth,” the UNCTAD report said.

Soaring food and fuel prices will have an immediate effect on the most vulnerable in developing countries, causing hunger and hardship for households that spend most of their income on food. But the loss of purchasing power and real spending will ultimately be felt by everyone.

“The danger for many developing countries that rely heavily on imported food and fuel runs deeper as rising prices threaten livelihoods, discourage investment and raise the specter of widening trade deficits,” indicates the report.

The uncertainties generated by the war in the main international markets are of growing concern, adds the report: an environment of unstable capital flows, exchange rate instability and rising borrowing costs, in particular for least developed and middle-income developing countries, with the risk of serious difficulties in paying their external debt.

Rate hikes in advanced economies, coupled with disorderly moves in global financial markets, could, the report warns, prove a devastating combination for developing economies. Volatility in commodity, currency and bond markets, as investors seek safe havens, has already triggered capital flight as well as rising risk premia on financial liabilities in developing economies.

Developing country bond yields have been rising since September 2021. The rise is widespread and is a clear signal of tighter financial conditions. Since the outbreak of the conflict in Ukraine, yields have increased for developing countries by an additional 36 basis points, on average, with countries heavily dependent on food imports seeing larger increases.

The report warns that traditional financial indicators such as current account positions and foreign exchange reserves do not paint a complete picture of vulnerability to changing external financial conditions. Measures of financial integration are a better indicator, with many large developing economies vulnerable to sudden reversals in financial flows.

Countries that appear vulnerable to a sudden halt due to a combination of heavy refinancing pressures and a large debt-service-to-exports ratio are Pakistan, Mongolia, Sri Lanka, Egypt and Angola. . Three of them, Pakistan, Egypt and Angola, already have long-term IMF programs in place.

The policies of advanced economies behind the economic slowdown

According to the report, the major advanced economies are on track to reverse the stimuli put in place during the pandemic, by tightening policy rates, canceling central bank asset purchases and closing leave programs, transfers and support for businesses and households.

The report warns that these changes will weaken global demand and dampen growth, with investment already stalled in some countries. “It’s the wrong political trend at the wrong time,” UNCTAD said.

UNCTAD has proposed five policy measures to protect the global economy. These include greater, more concessional and less conditional multilateral financial support for developing countries; immediate debt relief for Ukraine; increased use of special drawing rights to supplement official reserves and provide timely liquidity to avoid severe deflationary adjustments; more efficient and less ad hoc swap agreements between central banks to support developing country currencies and deal with financial crises; and sectoral policies, including price controls and subsidies, to counter pressures from the supply side and margins on inflation.

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