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Across the globe, the pandemic has carried a jaw-dropping bill — trillions of dollars in spending and borrowing to build field hospitals, buy vaccines and provide emergency aid to battered businesses and the unemployed. Factor in lost tax revenue as economies ground to a halt, and global debt scaled heights never seen before.
As the world economy bounces back, though, debt is emerging as yet another example of how the gap between richer and poorer nations is growing. After reaching a record high in the second quarter of 2021, global debt — government, corporate and household combined — nudged down to $296 trillion in Q3, according to a new report this week from the Institute of International Finance (IIF). This improvement was almost entirely in advanced countries, who have less complex economic recovery than many of the poorer nations.
In contrast, emerging market debt hit a fresh all-time high of $92.5 trillion, up $5.7 trillion during the first nine months of the year. Strip that down to just government debt, and emerging markets witnessed an 18.5 percent surge in stockpiles compared with the same period last year, while advanced economies witnessed a far slighter 3.6 percent bump.
In short, developing nations are maxing out their credit cards to make ends meet. This is because of the unbalanced global economy recovery. It increases fears about a more uneven world after a pandemic.
In October, the International Monetary Fund (IMF) sounded a broader warning. Advanced economies including Europe and United States are on track to regain their pre-pandemic economic trajectories next year, even exceeding them by 2024. Meanwhile, economic output in low-income nations and emerging markets excluding China — an outlier due to its sheer size and global reach — is expected to remain 5.5 percent below pre-pandemic forecasts even by 2024, resulting in what the IMF called “a larger setback to improvements in their living standards.”
The divergence stems in part from massively unequal vaccine access that is set to prolong the pandemic in Africa, Asia and Latin America. Emerging and low-income economies face tighter financing, as some begin to withhold fiscal support to their citizens and economies. This is despite the United States’ commitment to society-transforming infrastructure spending and Building Back Better. Some of the countries confronting the worst fiscal crunches — Tunisia, Costa Rica — are facing the prospect of economy-crimping austerity measures.
Past periods of high government debt risk — think Latin America in the 1980s, 1990s and early 2000s, and Europe in the 2010s — produced clarion calls of financial Armageddon that rippled across the globe. The U.S. Federal Reserve, along with others, are concerned about contagion risks arising from China’s deteriorating real estate market. It’s reasonable to wonder, however, where are the little chickens?
The reality, experts say, is that despite high debt loads, the sky may in fact not be falling. As the Economist recently noted, emerging market debt is far different — and safer — than it once was. Large developing countries have stopped offering short-term dollar-denominated debts to foreigners. Instead, they sell longer-term debt in local currencies to reduce their risk.
In addition, the pandemic era has seen some of the lowest interest rates on record — making debt less costly. A host of emerging export-dependent markets are thriving thanks to the rise in commodity prices.
“I think the time to be worried about a systemic debt crisis has passed, in the sense that the global economy is recovering, and the U.S. and the euro area, and some emerging markets as well, they are in recovery mode, but this recovery is unequal,” Marcello M. Estevao, global director of macroeconomics, trade and investment at the World Bank, told Today’s WorldView this week.
Debt crisis or not, the new IIF report shows the extra burden developing countries will bear in the long run from high borrowing. Over the next five year, interest spending is expected to increase in emerging markets even though it will fall for advanced countries. This means that there will be less money available for education and social spending, as well as a shift toward more sustainable economies.
Already, a handful are flashing fiscal code blues — for instance, and as always, Argentina.
For some low-income countries, push may soon come to shove. China is a large lender and has been less willing than the West to provide debt relief. And there are only a few short weeks left to a G-20 program that offered limited debt suspensions to a group of low-income countries.
At the same time, a G-20 and Paris Club plan — wonkily known as the “Common Framework for Debt Treatments” — to provide longer term relief remains clouded. Although Chad, Ethiopia, and Zambia tried to structure their debts using the program, negotiations have been slow. Private lenders are required to offer concessions, and they have been slow in moving forward. It has been a common occurrence for other countries with high levels of debt to be reluctant to join, fearing that it would only signal their financial woes and make them less able to borrow.
It just turns out the countries most at risk are so systemically unimportant to the global economy that investors do not seem overly concerned about their fates. This doesn’t necessarily mean that the world will ignore the urgent need to reduce debt.
During the Rome summit of G-20 leaders, World Bank President David Malpass warned of the consequences of inaction, according to Reuters. The debt owed by low-income nations rose 12 percent during the pandemic, even as they faced a scarcity of vaccines, inflation, energy shortages and a breakdown of the supply chain.
“The multiple problems are causing devastating reversals in development,” Malpass said. Meanwhile, he added, “progress on debt has stalled.”