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How to Beat Developing-Market Debt Crises

Even though developing countries' debt burdens have increased only moderately overall, the flow of funds they receive from capital markets has remained dismally low. Now that global financial conditions are tightening, advanced economies should extend a helping hand using the tools that they already have available.

CAIRO – Since the Latin American debt crisis of the 1980s, sovereign-debt crises have become a regular occurrence for emerging and developing economies. Today, Sri Lanka needs a bailout from the International Monetary Fund after defaulting on its foreign debt in May, and a growing number of low-income countries are facing similar challenges. The World Bank estimates that around 60% of all emerging and developing economies have become high-risk debtors. As many as a dozen might default over the next 12 months.

Unlike the advanced economies, where sharp increases in government debt following the emergence of COVID-19 encouraged a speedy return to trend growth, developing economies have been constrained by a shortage of vaccines and a lack of monetary and fiscal space. Unable to deficit-finance their way out of the synchronized global downturn, these countries now must contend with the economic fallout from the Ukraine crisis, which all but eliminates a near-term return to pre-pandemic growth rates.

With few exceptions – Sri Lanka and Zambia, for example – most developing economies are not heavily indebted. Collectively, their average debt-to-GDP ratio has increased by just seven percentage points (to 65%) since the start of the pandemic, much lower than the 20 percentage points increase in advanced economies where the combined sovereign debt now averages 122% of GDP. The flow of funds that developing economies receive from global bond markets and banks has remained dismally low. According to the most recent estimates from the Institute of International Finance, their combined sovereign liabilities represent less than 30% of global public debt.