These Nations Are at High Risk of a Serious Economic Crisis

 These Nations Are at High Risk of a Serious Economic Crisis

countries at risk of a dollar-induced economic collapse

Fears of an economic slump, an out of control dollar at a two-decade high, and depleted foreign exchange reserves all lead to a record number of developing countries being in serious situations right now. As a result of multiple nations displaying economic malaise comparable to Sri Lanka, including traditional debt problems, signs of falling currencies, 1,000 basis point bond spreads, and FX reserves, Reuters reports that a record number of developing nations are currently in difficulty. The list is below.

Rising borrowing costs, inflation, and debt all contribute to fears of an economic collapse. According to analysis, Belarus is on the verge of defaulting on its debt, and at least a dozen additional countries—including Belarus, Russia, Suriname, Zambia, Sri Lanka, Lebanon, and Russia—are also in default. The overall cost is astounding. Analysts use a pain threshold of 1,000 basis points in bond spreads to determine that $400 billion in debt is at risk. With about $150 billion, Argentina is the largest, followed by Ecuador and Egypt, each with between $40 and $45 billion. The only currencies that have appreciated versus the dollar this year are the Russian Rouble and the Brazilian Real, which many market experts attribute to capital controls. Investors are wondering how long the dollar rally will endure, although many are holding off on becoming dollar bearish until after that. The dollar has climbed by about 13% this year when measured against a basket of peers, hitting a two-decade high.

Thanks to a hawkish Federal Reserve and investors seeking security from the shaky global economy, it is likewise on course to have its best year since 1997. Currency Markets in 2022 (Reuters Graphic)

See the list of at-risk nations below, which is based on a Reuters report:

Argentina (Reuters Graphic: The Pain Has Spread)

The nation with the highest rate of sovereign defaults seems certain to raise its total. The peso is already trading at a near 50% discount on the black market, reserves are at an all-time low, and bonds are currently only worth 20 cents on the dollar, or around 50% of their value after the country's post-2020 debt restructuring. Even while there won't be much debt for the government to pay off until 2024, it will start to accumulate, and there are growing concerns that strong vice president Cristina Fernandez de Kirchner may try to persuade Argentina to violate its pledge to the International Monetary Fund.

Belarus (Reuters Graphic: Belarus Bonds) (Reuters Graphic: Belarus Bonds)

Belarus is now vulnerable to the same severe sanctions that drove Russia into default last month despite having sided with Moscow throughout the Ukraine campaign.

Ecuador

Only two years after entering debt, the Latin American country is now in chaos as a result of violent protests and a coup attempt against President Guillermo Lasso. Because the government is subsidizing food and fuel, JPMorgan has raised its forecast for the public sector fiscal deficit to 2.4% of GDP this year and 2.1% of GDP next year due to the country's high debt. Bond spreads have topped 1,500 basis points.

Egypt Egypt's declining foreign exchange reserves (Reuters Graphic)

Egypt has had one of the greatest outflows of foreign capital this year, JPMorgan estimates, totaling around $11 billion, with a debt-to-GDP ratio of about 95%. According to money management firm FIM Partners, Egypt will have to pay $100 billion in hard currency debt over the following five years, including a sizeable $3.3 billion bond, in 2024. Cairo depreciated the pound by 15% and asked the IMF for assistance in March. However, since then, bond gaps have increased to over 1,200 basis points, and credit default swaps (CDS), a tool used by investors to manage risk, now take a 55% likelihood that Cairo will miss a payment into account. However, the IMF or bilateral agreements, largely in the Gulf, would receive approximately half of the $100 billion Egypt must pay by 2027, according to Francesc Balcells, CIO of EM debt at FIM Partners. Under normal circumstances, Egypt "should be able to pay," he noted.

South America

After it declared bitcoin legal tender and shut the door on IMF hopes, trust levels dropped. An $800 million bond with a six-month maturity trades at a 30% discount, and longer-term bonds at a 70% discount, indicating that investors' confidence has declined to this amount.

(Reuters Graphic: Africa's Debt Issues) Ethiopia

Ethiopia is a financial powerhouse in Eastern Africa and has recently experienced significant economic growth. The capital city, Addis Abeba, is one of the richest in the world and is listed as the ninth richest city in Africa. Addis Abeba, however, will be among the first countries to benefit from debt relief under the G20 Common Framework initiative. Although the protracted civil war in the nation has hindered development, it is nonetheless making interest payments on its sole $1 billion international bond.

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Ghana (Reuters Graphic: How Not To Spend It)

The debt to GDP ratio in Ghana has increased to about 85% as a result of irrational borrowing. Its currency, the cedi, has lost approximately a quarter of its value this year, and it has already spent more than half of its tax revenue on debt interest payments. In addition, inflation has increased by 30%. Kenyan concerns are depicted in a Reuters graphic. Kenyan income is utilized to pay interest on borrowing to the tune of 30%. This scenario is significant because it now has no access to the capital markets and has debts with a 2024 maturity date worth more than $500 million. Regarding Kenya, Egypt, Tunisia, and Ghana, Moody's David Rogovic said, "These governments are the most susceptible simply owing to the quantity of debt coming due relative to reserves, and the fiscal challenges in terms of stabilizing debt burdens."

Nigeria

Currently, the Nigerian bonds' spread is just over 1,000 basis points. However, the nation's reserves, which have been gradually growing since June, should more than adequately cover the next $500 million in bond payments over the course of a year. However, debt service consumes over 30% of the government's revenue. I think many of these risks are being overpriced by the market, according to Brett Diment, head of emerging market debt at the investment firm abrdn.

Pakistan (Reuters Graphic: Countries In Debt Distress At Record High)

Pakistan and the IMF secured a significant agreement last week. The finding couldn't have happened at a better time, as the country is at risk of going through a balance of payments crisis due to growing energy import costs. Only $9.8 billion worth of foreign exchange reserves are left in the nation, barely enough to cover imports for five weeks. The dollar's rise will cause further suffering for the Pakistani rupee, which has fallen to historic lows. Spending cuts are now urgently needed because the new administration spends 40% of its revenue on interest payments.

Tunisia (Reuters Graphic: African Bonds Suffering)

Several African countries have applied to the IMF, but Tunisia seems to be one of the most at risk. The nation's strong, obstinate labor union and President Kais Saied's efforts to maintain his hold on power are to blame for the country's over 10% budget deficit and one of the highest public sector salary costs in the world. There are concerns that obtaining or maintaining an IMF programme may be challenging. With El Salvador and Ukraine as the next two most likely defaulters, Morgan Stanley has boosted the premium investors are willing to pay to buy Tunisian debt over US bonds to roughly 2,800 basis points. Marouan Abassi, the governor of Tunisia's central bank, has said that a deal with the IMF is now required.

Ukraine (Reuters Graphic: Bonds in Ukraine Prepare for Default)

The value of the Ukrainian hryvnia relative to the dollar has decreased by more than 5%. Major investors like Morgan Stanley and Amundi warn that Ukraine will almost certainly need to restructure its $20 billion or more in debt as a result of Russia's incursion. The deadline is in September, when $1.2 billion in bond payments are due. Reserves and aid funds may enable Kyiv to make payments. However, in light of state-run Naftogaz's request for a two-year debt freeze this week, investors think the government will do the same.

Few dare to block the dollar's path as it rages higher.

The degree of the dollar's gains during the recovery has shocked many. Investors are reluctant to impede the dollar's momentum, despite this. Nearly any currency appears appealing when compared to the dollar over the long run, but investors must consider what would happen if they open a position and the dollar continues to appreciate. Reuters was told by Brian Rose, a senior economist at UBS Global Wealth Management. While concerns about a recession have grown as a result of the Federal Reserve's aggressive tightening policy course, the economic picture for many others seems even more bleak, adding to the dollar's strength. It would be quite daring and naïve to believe differently, analysts at TD Securities remarked. "The USD remains king of FX."