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WWHAT TO WEAR? The question disconcerts many people shaken from their routines by the pandemic. This also worries investors. The world is full of “dirty shirts,” as Bill Gross, a legendary bond trader, put it, considering the bonds offered by heavily indebted governments. But you have to wear something. Thus, many investors buy treasury bills, despite America’s less than sparkling public finances, because it is the “least dirty shirt”.
The dirtiest clothes are found elsewhere, among the emerging markets of the world. They collectively owe $ 17 billion in public debt, or 24% of the world total. Eighteen of them have so far seen their credit rating downgrade in 2020 by Fitch, more than the year before. Argentina missed a $ 500 million payment on its foreign bonds. If he fails to convince creditors to exchange their securities for less generous securities by May 22, he will be in default for the ninth time in its history. The laundry pile also includes Ecuador, which has deferred $ 800 million in bond payments for four months to help it cope with the pandemic; Lebanon, which defaulted on a $ 1.2 billion bond in March; and Venezuela, which owes barrels of cash (and crude oil) to its bondholders, bankers and geopolitical benefactors in China and Russia. These defaulters could soon be joined by Zambia, which is seeking to recruit advisers for a “liability management exercise”, an agreement to pay creditors a little less, a little later than it had promised (see article).
As the pandemic wreaks havoc on economies and public finances, the natural question is: who is next? Over 100 countries, including South Africa, have asked the IMF to help. It has already approved 40 of the small quick loans it makes after natural disasters. Some countries are regular customers. Egypt is also requesting a new bailout just nine months after withdrawing the last loan payment agreed in 2016.
When the virus shook the financial markets for the first time, the threat of a real crisis in emerging markets was looming. Since January, foreign investors have withdrawn about $ 100 billion in bonds and stocks from emerging markets, according to the Institute of International Finance (IIF), a banking association. This is more than three times what they took out during an equivalent period of the global financial crisis (although these figures do not cover all capital flows and the emerging economies have grown significantly since 2008).
The feeling of panic has since started to subside. Federal Reserve swap lines with 14 central banks, including those in Brazil, Mexico and South Korea, helped alleviate the global dollar shortage. Capital outflows have eased and bond yields in emerging markets have fallen. This temporary suspension calls for a more discriminating assessment of the finances of emerging markets. The Economist ranked 66 countries on the basis of four financial strength indicators (see graph). Some, such as Russia, Peru and the Philippines, seem relatively robust. About thirty are in distress or are flirting with her. The alarm alphabet runs from Angola to Zambia. But these 30 represent a relatively small share of the group’s debt and GDP.
Covid-19 harms emerging economies in at least three ways: by blocking their populations, damaging their export earnings and deterring foreign capital. Even if the pandemic subsides in the second half, GDP in developing countries, measured at purchasing power parity, will be 6.6% lower in 2020 IMF had planned in October.
Export damage will be acute. Low oil prices will bring Gulf oil exporters more than 3% current account deficit GDP this year the IMF account, against a surplus of 5.6% last year. When exports are less than imports, countries generally close the gap by borrowing from abroad. But the reversal of capital inflows was accompanied by an increase in borrowing costs. In March, the risk premium that emerging markets must pay to buyers of their dollar bonds reached troubled levels (more than ten percentage points) for nearly 20 governments – a record number, says the IMF.
To overcome the crisis, emerging economies may need at least $ 2.5 billion, the fund estimates, from foreign sources or from their own reserves. One way to ensure that countries have more hard currency is to stop withdrawing it. the g20 A group of governments has declared that it will refrain from collecting payments this year on its loans to the poorest 77 countries (although borrowers will have to make up the difference later). the g7 group of countries urged private lenders to be patient as well. A group of over 70 private creditors supports the idea, while noting its “complexity” and the “constraints” faced by lenders.
A drastic debt stop may also be less necessary than it seemed even two weeks ago, as investors have calmed down somewhat. This may reflect excessive optimism about the evolution of the pandemic. But even false optimism can be a real help for emerging markets, allowing them to refinance debt on affordable terms.
Relative calm also allows a clearer look at the tensions in emerging markets. Some have large budget or external deficits; others have high debts. In some, the weak link is government; elsewhere, it is the private sector. The debt can be largely domestic, or it can be owed to foreigners – and sometimes also in foreign currency.
Our ranking examines 66 savings across four potential sources of danger. These include public debt, external debt (public and private) and borrowing costs (if possible based on the yield on government dollar bonds). We also calculate their probable external payments this year (their current account deficit plus their external debt payments) and compare them with their stock of foreign exchange reserves. The ranking of a country on each of these indicators is then a means to determine its overall position.
The strongest countries, such as South Korea and Taiwan, are overqualified for the role of emerging markets. Many larger economies, including Russia and China, also appear strong. Most of the countries that score poorly on all of our indicators tend to be small. The last 30 represent only 11% of GDPand less than a quarter of its external debt and its public debt.
The ranking also reveals large differences in the source and extent of potential weaknesses. Countries like Angola, Bahrain and Iraq have public debt that some say will exceed 100% GDP this year. But about half of the savings we’re looking at have debts below 60% GDP, the threshold that members of the euro area are supposed to reach (and that few do).
The Asian financial crisis of 1997 showed that solid public finances are not enough to protect an emerging economy if private companies borrow heavily from abroad. Mongolia’s public debt seems manageable (less than 70% of GDP) but its external debt (public and private) is almost twice GDP. Conversely, the well-known fiscal vulnerabilities of Brazil and India are mostly confined within their own borders.
Bond yields, on the other hand, show how expensive borrowing abroad will be. Sixteen of our group’s savings must offer yields in excess of 10% on their existing dollar bonds to find takers. But more than 20 have hard currency bonds that yield less than 4%, the type of cheap financing that was once reserved for wealthy countries. Some, like Botswana, have no dollar obligations, preferring to borrow in their own currency.
During 2020, the 66 economies in our fiscal year will have to find more than $ 4 billion to honor their external debt and cover any current account deficit. Excluding China, the figure is $ 2.9 billion. But that leaves aside the buffers accumulated by emerging economies. The governments in our exercise hold more than $ 8 billion in foreign exchange reserves (or nearly $ 5 billion, excluding China). Half have sufficient reserves to cover all their external debt payments due this year and any current account deficit. The rest (including 27 of the last 30) have a combined shortfall of approximately $ 500 billion. By far the largest dollar spread is in Turkey, which quickly ran out of reserves by intervening to support the lira.
The reserve deficit calculations ignore the risk of capital flight when the citizens of a country decide to withdraw their money from the country. But they also assume that countries will not attract any foreign direct investment and will not repay any of their external debts maturing this year. In March, such a scenario seemed too plausible. Now it looks too dark.
Indeed, in recent weeks, 11 emerging economies have been able to sell more than $ 44 billion in bonds, according to Gregory Smith of M&g Investments, an asset manager. Even Panama, with large external debts and a large reserve deficit, issued bonds with yields below 4% at the end of March. The sale was oversubscribed three times. In a world of dirty shirts, some investors want a Panama hat. ■
This article appeared in the Briefing section of the print edition under the title “Next in line”