Inflation hits the poorest most, economists often say as they welcome interest rate hikes which hit the poorest too. This seemingly sociopathic bunch tend to be in favour of short-term pain to improve the long-term. Which is why the Bank of England governor could say workers should not seek pay rises even as prices soared. Most economists are likely to endorse the biggest US interest rate in nearly 30 years and the interest rate rises in the UK.
But globally, it is those interest rate rises which hit the poorest countries most. There should have been a collective groan from Ghana to Pakistan on Wednesday night, 15th June, as the Federal Reserve in the US released its forecasts that US interest rates in 2023 will be over 3% instead of closer to 2% – its forecast from just a month ago.
Already global markets have taken fright and dumped the bonds they bought from low income countries in recent years. It was just last year, when US long-term borrowing costs were around 1-2%, that Rwanda (hitting the headlines for different reasons in the UK this month) could borrow at 5-6%. Today, when the US will pay you nearly 3.5%, investors will demand a far higher interest rate from riskier countries.
Long-term bonds for many now have a price that is around 50-60 cents on the dollar – compared to over 100 cents just a year ago. This is like your bank assuming they will only get repaid on the 50-60% of the mortgage they lent you. Investors do not expect to get repaid in full by Pakistan, Ghana or Tunisia, nor Sri Lanka and Zambia that have already defaulted. More countries will follow. Debt default often leads to currency collapse, more inflation (again worse for the poor) and a dramatic rise in poverty, as Lebanon, Venezuela and most recently Sri Lanka have all demonstrated in recent years.
Who’s to blame is a very natural question. Was it foolish fund managers who lent too much, or China who, often behind the scenes, lent a great deal too? Should corrupt local leaders be blamed for borrowing too much? Or do we simply blame Russia for global inflation and say this is just an unfortunate, unpredictable set of circumstances.
The problem is that the coming debt crisis has been predictable, but not for the reasons that many assume. As I argue in the forthcoming book, The Time Travelling Economist, debt default is normal among high fertility countries and most of the countries threatened by default in the coming years have a fertility rate above 3 children per woman.
What we show in the book is that high-fertility countries have very few savings. If you have 5-6 children per woman on average in a country, the children are your savings. After feeding and clothing them, you have nothing left to put in a bank on a Friday when you get paid. Local banks have few deposits to lend out, and what little they have, they lend out at very high rates, even as high as 20-25%. So governments welcomed the chance to borrow at 5-6% in US dollars as Rwanda did last year, and global investors jumped at the opportunity to lend to countries which wanted to accelerate infrastructure investment which can lift countries out of poverty. Rwanda boomed after issuing its first ever international bond in 2013, allowing it to dramatically increase annual spending on health, by far more than the interest costs of that bond.
The problem comes – as high fertility Latin America found out in the 1980s – when US interest rates drive up global borrowing costs. Low income governments can no longer borrow cheaply to repay maturing bonds (Rwanda was smart to refinance in 2021). They have to hike taxes locally or cut spending.
But not everyone suffers the same. Countries like Bangladesh with a fertility rate of 2.0 children per woman, doesn’t have the foreign debt pile that Pakistan with 3.4 children per woman has. They have never issued a Eurobond, because local banks had local savings accrued by parents who had to invest in their children. Bangladesh should thrive in the 2020s. Pakistan will struggle.
The coming debt crisis is a high fertility crisis, and one that politicians from Islamabad to Abuja will needs years to address. In the short-term, only concerted action by the G20, the IMF and the World Bank, can help ameliorate the economic pain that is coming. During the Global Financial Crisis and COVID, such support took over a year to arrive. For the West, 2022 and 2023 will be tough. For indebted high fertility countries, it will be worse.
Charlie Robertson is author of the Time-Travelling Economist, to be published by Palgrave Macmillan in the next few weeks. He has over 25 years experience as a London-based emerging market and frontier market economist, and has a niche following on Twitter @RenCapMan
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