Analysis: IMF plugs financing gaps as riskier emerging markets face squeeze

  • The IMF has disbursed $90 billion to 18 countries since the start of the Ukraine war
  • More than a quarter of EM debt is in default – JPMorgan
  • China reconsiders role as lender and redesigns financing options
  • IMF launches food shock financing window

WASHINGTON, Oct 14 (Reuters) – Little relief is on the horizon for a score of developing countries from Egypt to Malawi and Pakistan to Ecuador, all of which face painful economic straits as debt servicing costs continue to rise.

Officials at the International Monetary Fund (IMF) and other bodies expect the debt crisis to put even more pressure on these so-called “frontier markets,” which are already grappling with the fallout from the Russian war in Ukraine and the Federal Reserve’s tightening cycle cool down US inflation.

Many of these countries are also still struggling with the effects of the COVID-19 pandemic.

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Shut out of global debt markets and as China re-defines its role as the lender of choice for many poorer nations, countries are increasingly relying on IMF help to fill financing gaps.

“Your fiscal space to deal with all this is very small,” Gita Gopinath, the IMF’s first deputy managing director, said at a seminar on the sidelines of the annual IMF-World Bank meeting. “We will be dealing with this for several months.”

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The Washington-based lender has agreed new programs or expanded existing ones for 18 countries worth $90 billion since Russia invaded Ukraine in February, its chief executive Kristalina Georgieva said. Including assistance since the beginning of COVID-19, that total rises to $260 billion for 93 countries, while an additional 28 have expressed interest in assistance.

The fund must support vulnerable economies while ensuring that often painful economic reforms are not neglected.

“The IMF is trying to strike a balance between conditionality and agility,” said Patrick Curran, Tellimer’s senior economist, who is in Washington for the international lenders’ meetings.

“Countries like Pakistan, Egypt, Lebanon and Sri Lanka cannot just get the funding without any government commitments.”

Sri Lanka recently reached an employee-level agreement to free up nearly $3 billion, while Zambia was awarded a $1.3 billion loan program, a key move to receive payouts.

Both countries have defaulted on external debt but will also overhaul debts at bilateral lenders, with all eyes on China as the IMF and G7 economies insist Beijing implement debt relief for poorer countries.

Ghana, Egypt, Tunisia and Malawi are all in talks for some form of IMF funding.

China lends to poorer countries


Rising borrowing costs and risk aversion amid growth woes and rising inflation have seen countries like Kenya, Egypt and Ecuador locked out of capital markets.

More than a quarter of emerging market government bonds are trading with spreads over US Treasuries above 1,000 basis points – a threshold used to distinguish distressed debt, Deutsche Bank calculated in a recent report. Such yields make it impossible for countries to access international capital markets.

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With major central banks like the Fed and European Central Bank still in the early stages of rate-hike cycles, pressure on emerging-market currencies and bond yields would continue until at least the middle of next year, Deutsche Bank’s Michael Spencer said, adding the punch Currency devaluations, especially against the dollar, are the “main source of risk for public finances” in developing countries.

Investors have withdrawn $70 billion from emerging market debt funds so far in 2022, according to data from JPMorgan, which put year-end outflows at $80 billion.

There was much debate in Washington as to when creditors could change course and buy emerging market debt again.

March could be a turning point provided the Fed halts rate hikes after a spike in inflation. For others it is not so easy due to global uncertainty.

“It’s a world of higher interest rates, higher inflation and a slower economy,” added the Treasury chief of a large New York-based mutual fund.

More defaults are also in the pipeline, said Elena Duggar, director of credit strategy and research at rating agency Moody’s.

“Frontier markets, which rely heavily on external funding and have a larger proportion of foreign currency debt, have been the most vulnerable,” said Duggar, also in Washington.

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The debt burden of the countries has increased. The average government debt-to-GDP ratio — a key measure of the health of public finances — rose from 36% in 2012 to 60% in 2022, according to the IMF’s latest Global Financial Stability Report.

Turning to the IMF for financing has been the traditional playbook for smaller, stressed countries in times of crisis.

A range of new IMF tools should also help direct more resources to such countries in the short term.

A food shock funding window aims to help countries facing shortages and urgent balance of payments needs, while the Resilience and Sustainability Trust adds funding to help countries deal with climate change, pandemics and other longer-term issues

However, IMF funding alone is unlikely to be enough and the conditions attached may be more of a hindrance than a help, said JPMorgan’s Nicolaie Alexandru-Chidesciuc.

“But the IMF acts as an anchor and allows access to a wider range of financing, even if it doesn’t come from the market,” Alexandru-Chidesciuc said.

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Reporting by Jorgelina do Rosario in Washington, additional reporting by Karin Strohecker in London; Adaptation by Toby Chopra

Our standards: The Thomson Reuters Trust Principles.


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