Emerging Market Vulnerabilities

Last week, the International Monetary Fund (IMF) lowered its outlook for the global economy, painting a gloomy picture of subdued growth, with advanced economies lagging. The Fund expects emerging markets (EMs) to outperform their developed counterparts in the next two years, largely driven by major hubs like China and India.

In fact, the outlook for smaller and low-income countries is quite bleak. Smaller developing countries are dealing with a host of challenges from rising borrowing costs, food insecurity and weaker external demand caused by de-globalization.

The combination of rising debt servicing costs, low reserves and softer growth could lead to a systemic debt crisis in the developing world. Several developing economies are facing sovereign credit spreads above 1,000 basis points, a sign of distress. According to the IMF, 17% of low-income economies are already in debt distress and 39% are estimated to be at high risk.

With pandemic-era support programs such as the Debt Service Suspension Initiative now sunset, we could see a new wave of debt-restructuring requests. Handling these will potentially be more difficult than in the past, owing to the evolving creditor landscape.