The high level of payments on government bonds led to a reduction in the financial potential of this group of states and limited the amounts allocated by them for crisis response. This factor has a negative impact on the economies of these countries, slowing down the recovery pace.
Over the past decade, the sovereign debt of developing countries has grown significantly - from USD 1.5 trillion in 2009 to USD 3 trillion in 2020, with the largest increase in Africa. An even faster increase in liabilities was noted in the private sector of this group of states. They grew from USD 2.2 trillion in 2009 to USD 5.8 trillion by 2020(1). As a result, the total debt of the developing world, including emerging market countries, reached 176% of their GDP, including private debt - 123% of GDP(2).
The growth in the commitments of developing countries was driven by several factors. The key factor was the soft monetary policy of economically developed countries. It caused a large-scale decline in interest rates and thereby increased investor interest in riskier investments, including the liabilities of emerging economies. The expansion of several financial instruments and the entry of new participants into the markets also had a significant impact, which provided developing countries with access to the international capital market. It resulted in an increasing share of private investors in their liabilities (48% in 2019 compared to 26% in 2000(3) and a related increase in the cost of debt service. The latter indicator has exceeded by 2020 30% of annual export earnings compared to 16% in 2010(4). There was also a sharp decline in the ratio of foreign exchange reserves and short-term debt (from 505% in 2008 to 278% in 2019)(5).
As a result, many developing economies have faced by 2020 an increased negative impact of the debt factor on their budgetary capacity. More than half of the least developed countries, as well as several middle-income countries, began to be assessed by international financial institutions (IFIs) as having high debt risks. At the same time, the efficiency of using borrowings decreased. The average growth rate of investments in fixed assets, recognized by experts as a key factor of economic growth, decreased (from 8% in 2009 to 2.5% in 2019)(6). This was caused by channeling the borrowed capital to cover current expenses, for example, to service current debt, which reduced the long-term financial capacity of sovereign debtors.
The pandemic fallout has increased pressure on the budgets of developing countries. Despite the help from IFIs, more than half of the developing countries experienced capital outflows and an increase in the cost of borrowing(7). At the same time, the crisis response financing led to a further increase in government obligations. For the last 12 months, their volume increased by a record 9%(8). As a result, the debt of more than 120 states has reached, according to some estimates(9), a level that will not allow them to independently settle debt servicing if the further external deterioration. In some countries, debt payments accounted for, for example, half of budget revenues (Angola, Ghana, Nigeria)(10).
According to UN experts, many developing countries have fallen into the trap of high debt and low growth rates. Their capabilities are insufficient for the implementation of programs supporting the population and national enterprises that are adequate in terms of volume, which may result in a protracted exit of their economy from the crisis(11). In particular, the budget deficit of every fifth developing economy exceeded 10% of GDP in 2020(12). In 2021, according to IMF forecasts, their burden of obligations will reach peak values. Public debt will remain a factor of increased vulnerability as to the lack of a significant reduction of the budget deficit(13).
A way out of this situation can be the development of a special international program, which will not only ensure a reduction in the volume of liabilities of sovereign debtors but will also stimulate the growth of their economy. Otherwise, weak recovery will limit the possibilities of borrowing external financing and, accordingly, the investment and financial potential of this group of states(14). Experts note that even an optimistic scenario where developing countries can avoid a deep debt crisis forces them to raise tax rates, cut costs, and public investments, including those directed to social needs, innovation, and infrastructure(15). Ultimately this will not allow them to ensure long-term economic growth and jeopardize the achievement of sustainable development goals, primarily overcoming poverty(16).
In general, it seems necessary to take additional measures to reduce the debt burden of the developing countries in order to enable them to stabilize their fiscal systems, overcome the crisis caused by the pandemic, and ensure economic recovery. The currently implemented initiatives are unlikely to significantly improve the debt situation in the states of this group. In this case, the time factor is essential. Historical background speaks of that the delay in restructuring bad debt causes a more significant decline in business activity and investment of debtor countries(17).
(1) World Economic Situation and Prospects 2021 // United Nations. New York. 2021. P.31.
(2) Global Economic Prospects, January 2021 // World Bank. Washington, DC. 2021. P. 12.
(3) Impact of the COVID-19 Pandemic on Trade and Development: Transitioning to a New Normal // United Nations Conference on Trade and Development. Geneva. 2020. P. 60.
(4) World Economic Situation and Prospects 2021. P. 31.
(5) Impact of the COVID-19 Pandemic on Trade and Development: Transitioning to New Normal. P. 60.
(6) World Economic Situation and Prospects 2021. P. 33.
(7) Global Economic Prospects, June 2020 // World Bank. Washington, DC. 2020. P. 12.
(8) Global Economic Prospects, January 2021. P. 12.
(9) Kaiser J. Global Sovereign Debt Monitor 2020 // Jubilee Germany, MISEREOR. 2020. P. 8.
(10) Kraemer M. African Countries Need Not Fear Default // Project Syndicate. 2020. December 30.
(11) Public finances after COVID-19: is a high-debt, low-growth trap looming for developing countries? // UN Department of Economic and Social Affairs. World Economic Situation and Prospects Monthly Briefing. No. 142. 2020. October 1. P. 4.
(12) World Economic Situation and Prospects 2021. P. 23.
(13) Fiscal Monitor Update // IMF. 2021. January. P. 5.
(14) Remarks by World Bank Group President David Malpass to the Annual Meetings 2020 Development Committee // World Bank. 2020. October 16.
(15) Напр.: Prospects for the global economy in 2021 // Oxford Analytica. Daily Brief. 2020. December 1.
(16) Public finances after COVID-19: is a high-debt, low-growth trap looming for developing countries? P. 4.
(17) Global Economic Prospects, January 2021. P. 16.