THE world should brace itself for a spate of debt crises as a dozen developing countries could become unable to service their debts in the next 12 months, a World Bank expert has warned.
In a blog, World Bank Macroeconomics, Trade & Investment Global Director Marcello Estevão said high inflation, slow growth, tightening financial conditions, and the invasion of Ukraine are a “combustible” mix that will lead to high debt.
What is worrisome, Estevão said, is that the majority of these debts are owed to commercial creditors, making it likely for interest rates for these debts to rise as suddenly as in the case of credit-card debts.
“Over the next 12 months, as many as a dozen developing economies could prove unable to service their debt. That’s a large number, but it would not constitute a systemic global debt crisis,” Estevão said. “Yet it would still be significant—the largest spate of debt crises in developing economies in a generation.”
Estevão said the situation this time around would be different from previous experiences of debt crises. This time, the majority of the debt is owed to commercial and bilateral creditors.
For low-income countries, Estevão said, of the almost $53-billion debt accumulated by these countries, only $5 billion are owed to Paris Club creditors.
The Paris Club is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor countries.
Paris Club permanent members are: Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Russian Federation, Spain, Sweden, Switzerland, United Kingdom, United States of America.
Commercial debt 5X more
“At the end of 2020, low- and middle-income economies owed five times as much to commercial creditors as they did to bilateral creditors,” Estevão said. “Much of the debt of developing economies, moreover, now involves variable interest rates—meaning they could rise almost as suddenly as rates on credit-card debt.”
In order to address this amount of debt, Estevão said the World Bank, International Monetary Fund (IMF) and G20 established the Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI), which expired in 2021.
However, Estevão said only three countries have applied for this, and progress on restructuring their debts has been slow. Many countries fear that subscribing to the Common Framework for Debt would cut off their access to “private capital without restoring the flow of bilateral credit.”
Nonetheless, he said the framework was the “only game in town” and can be improved to provide meaningful relief to countries that need it.
The World Bank and IMF, Estevão said, offered a roadmap to the changes by establishing a clear timeline for what should happen when in process: the creditors committee, for example ought to be formed within six weeks and suspending—for the duration of the negotiations—debt-service payments to official creditors for all Common Framework applicants.
The changes also include assessing the parameters and processes of the comparability of treatment and clarify the rules for its implementation and expanding the Common Framework’s eligibility requirements, which are currently limited to 73 of the poorest countries.
Estevão said the eligibility should be expanded to cover other highly indebted and vulnerable lower-middle-income countries as well.
“For too long, the world has taken a tragically languorous approach to resolving debt crises in developing economies , delivering relief that is either too little or too late. It’s high time for a 21st century approach—one that involves preemption rather than reaction, one that prevents the crisis from erupting in the first place,” Estevão said.
Record $12.03-T debt
The Bureau of the Treasury (BTr) earlier disclosed that the national government’s outstanding debt ballooned to a new record high of P12.03 trillion as of end-January this year.
The debt jumped by 16.5 percent from P10.33 trillion a year ago. It is also up by 2.6 percent from P11.73 trillion by the end of 2021.
Of the total debt stock, 69.6 percent comprised domestic borrowings, while 30.4 percent came from foreign sources. Domestic debt as of end-January amounted to P8.37 trillion, jumping by 14.2 percent year-on-year from P7.33 trillion.
Compared to its level as of end-2021, domestic debt grew by 2.4 percent from P8.17 trillion due to the net availment of P197.04-billion domestic financing, including the P300 billion in provisional advances that the national government availed of from the Bangko Sentral ng Pilipinas for budgetary support amid the Covid-19 pandemic.
On the other hand, external debt as of end-January soared by 22 percent to reach P3.66 trillion from P3 trillion a year ago. It also inched up by 2.9 percent from P3.56 trillion in December 2021.
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