Countries at risk of economic crisis due to rampant dollar
The rampant dollar at two-decade high crushes the purchasing power of most currencies on international markets, fear of economic recession and burned foreign exchange reserves indicate a record number of developing countries are currently in a severe squeeze.
According to Reuters, a record number of developing countries are currently struggling as some are exhibiting economic instability similar to Sri Lanka, which includes typical debt crises, signs of a currency collapse, 1,000 basis points bond spreads, and foreign exchange reserves. See the list below.
Rising borrowing prices, inflation and debt are all fears of an economic fallout, with analysis showing Sri Lanka, Lebanon, Russia, Suriname and Zambia already defaulting, Belarus on the verge of default, and at least one dozens of other countries are at risk of default.
The total price is amazing. Analysts estimate that $400 billion in debt is at risk using the 1,000 basis point bond spread as a pain threshold. Argentina is the largest, with more than $150 billion, followed by Ecuador and Egypt, each with between $40 and $45 billion.
The Russian ruble and the Brazilian real are the only currencies that have appreciated against the dollar this year, which many market experts attribute to capital controls.
Investors are questioning how long the rise in the dollar can last, but many are waiting to turn bearish on the dollar before doing so. Against a basket of other currencies, the dollar is up nearly 13% this year, hitting a two-decade high.
It is also on track for its best year since 1997, thanks to the hawkish Federal Reserve and investors seeking safety from the uncertain global economy. (Reuters graphic: Currency markets in 2022)
See below for a list of countries at risk, based on a Reuters report:
Argentina(Reuters graphics: The pain has spread)
The world leader in sovereign default seems certain to increase its totals. In the illicit market, the peso is now trading at a discount of nearly 50%, reserves are at all-time lows, and the bond is now worth 20 cents to the dollar, less than half the price. debt restructuring after 2020.
While the government won’t have much debt to pay until 2024, it will start to pile up and there are growing concerns that powerful vice-president Cristina Fernandez de Kirchner could try to force Argentina to break its pledge. with the International Monetary Fund.
Belarus (Reuters graphics: Belarusian Bonds)
After standing with Moscow in the Ukraine campaign, Belarus is now subject to the same harsh penalties that caused Russia to default on its debt last month.
Ecuador
The Latin American nation only went into default two years ago, but violent protests and efforts to remove President Guillermo Lasso have plunged the country into turmoil.
It has a hefty debt, and JPMorgan has raised its public sector fiscal deficit forecast to 2.4% of GDP this year and 2.1% of GDP next year because the government is subsidizing food and fuel. The spread on the bond surpassed 1,500 bps.
Egypt (Reuters graphics: Egypt’s declining foreign exchange reserves)
With a debt-to-GDP ratio of about 95%, Egypt has experienced one of the largest outflows of foreign capital this year, JPMorgan estimates, totaling around $11 billion.
Egypt is expected to pay $100 billion in foreign currency debt over the next five years, including a sizable $3.3 billion in bonds, by 2024, according to fund management firm FIM Partners.
Cairo has reduced the value of the pound by 15% and asked the IMF for support in March. However, bond spreads have since grown to more than 1,200 basis points, and credit-debt swaps (CDSs), a tool used by investors to manage risk, now lead to the There is a 55% chance that Cairo will default on one payment.
However, according to Francesc Balcells, Managing Director of EM Debt at FIM Partners, about half of the $100 billion Egypt has to pay by 2027 will go to the IMF or bilateral arrangements, mainly in the Gulf. . Egypt “will be able to pay under normal circumstances,” he added.
El Salvador
Trust levels plummeted after it made bitcoin a legal tender and closed the door to IMF hopes. Investor confidence has dropped to the point where a six-month, $800 million bond is trading at a 30% discount and a longer-term bond at a 70% discount.
Ethiopia (Reuters graphics: Africa’s Debt Problem)
Ethiopia is a financial powerhouse in East Africa and has seen major economic expansion in recent years. Addis Abeba, the nation’s capital, ranks as the eighth richest city in Africa and one of the richest on the continent.
But one of the first countries to be forgiven under the G20 Common Framework will be Addis Abeba. Although the country’s protracted civil war has slowed progress, it still has to pay interest on its only $1 billion international bond.
Ghana (Reuters graphics: How not to spend it)
Borrowing frenzy has driven Ghana’s debt-to-GDP ratio to nearly 85%. It has spent more than half of its tax income on debt interest, and its currency, the cedi, has lost about a quarter of its value this year. In addition, inflation has increased by a third.
Kenya (Reuters graphics: Kenya’s concerns)
About 30% of Kenya’s income is used to pay interest on loans. Given that it currently lacks access to financial markets and has bonds worth more than half a billion dollars due to mature in 2024, the situation is problematic.
Moody’s David Rogovic said of Kenya, Egypt, Tunisia and Ghana: “These countries are the most vulnerable because of the amount of debt coming due relative to reserves, and the fiscal problems in terms of regulation. stabilization of the debt burden”.
Nigeria
The gap on Nigeria’s bonds is now a little over 1,000 bps. However, the country’s reserves, which have grown steadily since June, should comfortably meet the country’s next $500 million bond payment in a year. However, the government spends almost 30% of its income on debt service.
“I believe the market is overpriced for this much risk,” said Brett Diment, head of emerging markets debt at investment firm abrdn.
Pakistan (Reuters graphics: Countries are struggling with debt at a record high)
Last week, Pakistan reached an important IMF deal. The discovery could not have come at a better time, as the rising cost of energy imports is putting the country at risk of a balance of payments crisis.
The country’s foreign exchange reserves have fallen to just $9.8 billion, just enough for five weeks of imports. The Pakistani rupee has fallen to a record low, and more pain will come before the dollar’s rise. As the upcoming administration spends 40% of revenue on interest payments, spending cuts are now urgently required.
Tunisia (Reuters graphics: African bonds suffer)
Africa has a number of countries applying to the IMF, but Tunisia appears to be one of the most vulnerable.
Due to President Kais Saied’s efforts to consolidate his power and the nation’s strong, stubborn labor union, the country ran a budget deficit of nearly 10 percent, one of the nation’s wage bills. highest public sector in the world. There are concerns that it may be difficult to secure or comply with an IMF program.
High-profile investors’ demand to buy Tunisian debt for US bonds has risen to nearly 2,800 basis points, placing the country alongside El Salvador and Ukraine as Morgan’s three most likely defaults Stanley. The head of Tunisia’s central bank, Marouan Abassi, has stated that an agreement with the IMF is now needed.
Ukraine (Reuters graphics: Ukrainian bond brand for default)
The Ukrainian hyrvnia fell more than 5% against the dollar. Due to Russia’s aggression, big investors like Morgan Stanley and Amundi warn that Ukraine will almost certainly need to restructure its debt of $20 billion or more.
The deadline is September when bond payments worth $1.2 billion are due. Kyiv can pay off the reserves and aid money. However, investors believe the government will follow through on a request from the state of Naftogaz for a two-year debt freeze this week.
When the dollar rate is higher, few dare to stand its way
On the greenback, what surprised many was the extent of the dollar’s strength. However, the dollar’s momentum has made investors hesitant to stand in its way.
“Almost any currency looks attractive against the dollar on a long-term basis, but investors have to ask themselves… what if you put in a position and dollar continues to strengthen? Brian Rose, senior economist at UBS Global Wealth Management, told Reuters.
While Recession worries have increased as the Federal Reserve is on track for aggressive policy tightening, the economic outlook for many other countries is even more bleak, boosting the dollar’s strength even further.
Analysts at TD Securities note: “USD is still the king of FX and it would be brave and naive to assume otherwise.
What the strong dollar did was push other countries’ foreign exchange reserves down sharply, as billions of dollars were sold in market interventions that caused their currencies to depreciate significantly.
