Emerging markets’ debt-to-GDP ratio returned to record highs despite a US$6.4 trillion decline in the global debt pile to US$290 trillion in the third quarter due to a strong dollar and slowing bond sales, an Institute of International Finance (IFF) report found.
Budget deficits and slower economic growth lifted the debt-to-GDP ratio in developing economies to 254%, matching a record high hit in the first quarter of 2021, the IIF said in its latest Global Debt Monitor published on Tuesday.
The amount of overall emerging market debt, however, slipped to $96.2 trillion from $98.7 trillion the previous quarter. Meanwhile the global debt-to-GDP ratio fell for a sixth consecutive quarter, to 343% of GDP.
High-yield borrowers have seen spreads widen by about 400 basis points on average this year but the widening has been smaller for investment grade borrowers, according to the IIF.
“In the face of tightening global financing conditions, access to international markets has become even more challenging for many high-yield borrowers this year,” Emre Tiftik, director of sustainability research at the IIF wrote in the report.
Policymakers and rating agencies have warned that debt pressures on fragile developing economies are far from over and more defaults were likely.
The higher cost of debt servicing could particularly hurt countries most exposed to the effects of climate change, the IIF said.
A deal struck at the COP27 climate talks in Egypt over the weekend agreed to set up a “loss and damage” fund to help poorer countries pay for the impacts of climate disaster while highlighting the need to reform international financial institutions.
The global banking trade group said in its quarterly report that despite a reduction in dollar-debt reliance in the past years, it remains at high levels in Latin America and Africa, “leaving many countries heavily exposed to swings in foreign exchange markets.”
“Given their high reliance on short-maturity funding,” said the IIF, “lower-income households and small-sized firms have been disproportionately affected by higher borrowing costs, with one-third of small-sized firms in mature markets facing difficulty in covering interest expenses.”
The dollar .DXY rose as much as 20% strongest in the third quarter, though it has pared that gain to 12% higher so far this year. Emerging market currencies .MIEM00000CUS fell as much as 10% to the greenback this year and are now down 7%.-moneyweb