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Saturday, April 23, 2022 Vol. 17 No. 195
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RESIDENTS queue for kerosene in Colombo, Sri Lanka, on April 12, 2022. JONATHAN WIJAYARATNE/BLOOMBERG
ONCOMING Hunger and blackouts mark start of an emerging economy crisis
TRAIN CRASH
A
By Shawn Donnan, Eric Martin, Andrew Rosati & Jihen Laghmari Bloomberg News
BARRAGE of shocks is building that’s unlike anything emerging markets have had to confront since the 1990s, when a series of rolling crises sank economies and toppled governments. Turmoil triggered by rising food and energy prices is already gripping countries like Sri Lanka, Egypt, Tunisia and Peru. It risks turning into a broader debt debacle and yet another threat to the world economy’s fragile recovery from the pandemic. Compounding the danger is the most aggressive monetary tightening campaign the Federal Reserve has embarked on in two decades. Rising US interest rates mean a jump in debt-servicing costs for developing nations— right after they borrowed billions to fight Covid-19—and tend to spur capital outflows. And on top
of it all: the stark reality that war in Europe, which is driving the latest food and energy shock, shows few signs of ending. The cocktail of risks has already pushed Sri Lanka to the brink of default on its bonds. A handful of other emerging economies, from Pakistan and Tunisia to Ethiopia and Ghana, are in immediate danger of following suit, according to Bloomberg Economics. Of course, the developing world’s commodity exporters stand to benefit from higher prices. Still, there are other troubles brewing, with a new Covid-19 outbreak locking down key cities in China, and growing angst
that Europe and the US will fall into recession. The world’s top economic policy makers are sounding the alarm. The dominant themes at the spring meetings of the International Monetary Fund (IMF) and World Bank in Washington this week are a slowing global economy and the rising risks—seen and unseen— facing developing nations.
‘Seismic waves’
THE IMF, in its latest World Economic Outlook, likened the war’s impact to “seismic waves” rolling over the global economy. It also warned of the possible return in emerging markets of the sort of “doom loop” that led Russia to default in 1998, helped bring Vladimir Putin to power and took hedge fund Long Term Capital Management (LTCM) to the verge of collapse. The World Bank slashed its global growth forecast and announced the creation of a $170-billion rescue package—bigger than its Covid-19 response—for crisishit nations. “We can see this train wreck coming towards us,” said John Lipsky, who spent half a decade as No. 2 at the IMF. The combination of real-economy shocks and financial-
market tightening, he said, is “going to push a large number of lowincome countries into the need for debt restructuring.” The biggest default looming in emerging economies is in Russia, where Putin’s decision to invade Ukraine has brought sanctions, economic isolation, and a pledge to pay debts only in rubles—which would likely be ruled a breach of commitments, triggering losses for investors. Still, Russia’s role as the sanctions-hit aggressor make it a unique case. Which means Sri Lanka, for now, is at the vanguard of the potentially broader crisis. The country’s currency is down nearly 40 percent this year. Last week, it suspended foreign debt payments, deciding to use what’s left of its reserves to cover food and energy imports rather than pay investors. For people like Jagath Gunasena, the crisis has already arrived. It’s meant sending his wife and son to stand for hours to refill the cooking-gas cylinder they need to run their Colombo food stall—only to see them turned away when supplies run out. “At least we have leftovers from our food stall to eat,” Gunasena said. “I don’t know how
the others will find ways to cook or get by.” That kind of uncertainty has driven protesters to call for President Gotabaya Rajapaksa to resign even as his government tries to negotiate help with the IMF and Asian powers like China and India. Sri Lanka may be the first. But it’s not alone. Some 13 emerging countries have bonds trading at least 1,000 basis points above US Treasuries, up from six a year ago. Credit-default swaps on developing-country debt spiked in the first weeks of the Ukraine war, show-
ing a growing fear of default— and while they’ve since retreated, they’re still some 90 basis points above last year’s average. Bloomberg Economics, which keeps scorecards of the building risks for emerging market (EM) countries, puts Turkey and Egypt top of the list of major EMs exposed to “economic and financial spillovers” from the Ukraine war. And it ranks Tunisia, Ethiopia, Pakistan, Ghana and El Salvador — with large debt stocks and borrowing costs that have risen by Continued on A2
The direct impact of a default in five countries such as these on the global economy would be small, but crises in the developing world have a history of spreading well beyond their starting points. “In a cascade of emerging-market credit events, the negative impact of the whole could be larger than the sum of the parts.”—Ziad Daoud, Bloomberg Economics’ chief EM economist PESO EXCHANGE RATES n US 52.3950
n JAPAN 0.4080 n UK 68.3021 n HK 6.6791 n CHINA 8.1206 n SINGAPORE 38.3987 n AUSTRALIA 38.6308 n EU 56.7857 n SAUDI ARABIA 13.9709
Source: BSP (April 22, 2022)