UNCTAD: Developing countries to require $310B for servicing external debt

According to the United Nations Conference on Trade and Development (UNCTAD), developing countries are projected to require $310 billion to meet external public debt service requirements in 2022 – equivalent to 9.2% of the outstanding stock of external public debt at the end of 2020, Report informs referring to an update to the UNCTAD Trade and Development report.

The report points to short-term public debt servicing needs as a growing concern.

“Countries which appear vulnerable to a sudden stop due to a combination of large rollover pressures and a large debt service to export ratio include Pakistan, Mongolia, Sri Lanka, Egypt and Angola. Three of these, Pakistan, Egypt and Angola, already have long-term IMF programs in place,” reads the report.

The war has put further upward pressure on international prices of energy and primary commodities, stretching household budgets and adding to production costs, while disruptions to trade and the effects of sanctions are likely to have a chilling effect on long-term investment, according to UNCTAD.

“Coming just as pandemic-induced disruptions seemed to subside, the geopolitical crisis has dealt a blow to confidence domestically. “The added pressure of price increases is intensifying calls for a policy response in advanced economies, including on the fiscal front, threatening a sharper than expected slowdown in growth,” the UNCTAD report says.

According to the forecast, soaring food and fuel prices will have an immediate effect on the most vulnerable in developing countries, resulting in hunger and hardship for households who spend the highest share of their income on food: “But the loss of purchasing power and real spending will ultimately be felt by everyone.

The danger for many of the developing countries that are heavily reliant on food and fuel imports is more profound as higher prices threaten livelihoods, discourage investment and raise the specter of widening trade deficits,” the report says.

Of growing concern, the report adds, are the uncertainties generated by the war in key international markets: an environment of volatile capital flows, exchange rate instability and rising borrowing costs, particularly for least developed and middle-income developing countries, with the risk of serious external debt payment difficulties.

Rate hikes in advanced economies, alongside disorderly movements in global financial markets, could, the report warns, prove a devastating combination for developing economies.

“Volatility in commodity, currency and bond markets, as investors seek out safe havens, have already triggered capital flight along with higher risk premia on the financial liabilities of developing economies.

Developing country bond yields have been on the rise since September 2021. The increase is widespread and is a clear signal of tighter financial conditions. Since the breakout of the conflict in Ukraine yields have increased for developing countries by a further 36 basis points, on average, with countries heavily dependent on food imports experiencing higher increases,” the report noted.

The report warns that traditional financial indicators such as current account positions and foreign reserves do not give a full picture of the vulnerability to changing external financial conditions: “Measures of financial integration are a better gauge with many large developing economies vulnerable to sudden reversals in financial flows.”