More developing countries will face debt distress

Subject

EMDC debt distress.

Significance

COVID-19 has triggered a global economic crisis, surpassing the declines caused by the 2008-09 global financial crisis. Massive fiscal packages have been launched to mitigate the health impact and economic disruption, pushing government debt sharply higher worldwide. The debt burden is particularly onerous in many emerging markets (EM) and low-income countries (LIC). The reckoning will come when the pandemic subsides and investors scrutinise the debt sustainability of different countries.

Impacts

• Currency weakness will raise foreign currency debt repayment costs while lower GDP will erode tax income, squeezing budgets in EMDCs.
• Weak healthcare and fiscal constraints will make indirect COVID-19 impacts harsher than direct effects for many EMDCs.
• EMDCs owe large sums to private creditors and non-Paris Club states such as China; these actors' approach is key to coordinated debt relief.