Allianz: Emerging markets debt distress to rise in 2 years

The global economic landscape has been significantly altered by the COVID-19 pandemic, with emerging markets and low-income developing countries facing an uphill battle towards debt distress. According to Allianz, debt distress is expected to rise in these regions over the next two years, leading to further sovereign downgrades and potential defaults. Ludovic Subran, Chief Economist at Allianz, highlighted the pressing need for a minimum of $450 billion in financing for low-income countries to bolster their spending response to the ongoing crisis. The impact of COVID-19 on public debt sustainability has been particularly harsh for developing nations, as traditional debt analysis methods may not accurately identify high-risk economies in the current environment. Factors such as rising debt service costs, reduced revenues from sectors like tourism, and commodity price fluctuations have exacerbated the financial challenges faced by countries in Africa and beyond. Subran pointed out that countries like Tunisia, Angola, Mozambique, and Ghana are particularly vulnerable due to high levels of foreign exchange debt and significant exchange rate volatility. The reliance on foreign financing poses a substantial risk, especially if repayment obligations are denominated in foreign currencies like the US dollar. Drawing comparisons to past debt crises in countries like Greece, Argentina, and Italy, Subran highlighted the need for emerging economies to enhance self-financing mechanisms and reduce dependency on foreign capital inflows. The lack of monetary independence and fiscal self-sufficiency could leave countries in Africa and other emerging markets vulnerable to financial shocks in the aftermath of the pandemic. Addressing the issue of institutional support, Subran underscored the importance of international organizations like the World Bank and the IMF in providing assistance during times of crisis. While there have been efforts to mobilize resources for debt relief and economic recovery, Subran emphasized the need for a shift in focus towards sustainable growth and equitable vaccine distribution to address the root causes of economic distress. One innovative proposal highlighted by Subran is the allocation of Special Drawing Rights (SDRs) by the IMF, supported by French President Macron. This initiative aims to provide additional liquidity to countries facing financial strains, allowing them to access additional resources to navigate the economic fallout from the pandemic. By leveraging SDR allocations, low-income countries like Ivory Coast could double their financial reserves, providing a much-needed lifeline in turbulent times. As the global economy grapples with the long-term repercussions of the pandemic, the looming debt crisis in emerging markets and low-income countries serves as a stark reminder of the urgent need for coordinated international action and sustainable financial solutions to safeguard vulnerable economies from destabilization.