- Sovereign bonds in 2024
- A debt of 29,000 billion dollars
- The IMF under pressure
As a turbulent 2025 dawns, emerging countries are bracing themselves to take on ever-increasing responsibilities due to soaring interest payments on the $29 trillion debt accumulated over the last decade.
The latest figure confirmed by the UN is an unprecedented record: 54 countries spend more than 10% of their income on interest payments, while in countries like Pakistan and Nigeria, more than 30% of revenue is spent on debt interest payments alone.
These drastic increases in domestic and foreign debt reached around $850 billion last year, forcing countries to redirect funds toward domestic spending on hospitals, roads and schools, increasing risks for investors. emerging markets.
In this regard, Roberto Sifón-Arévalo, head of global sovereign ratings at S&P Global, said in an interview that “the interest burden is enormous, there is a lot of uncertainty, but the stakes are high.”
While the challenge is significant, it is not the only one responsible for the start of an uncertain year for emerging markets. Other factors setting the stage for a turbulent 2025 include the return of the Trump administration and its specific outlook for U.S. interest rates and the dollar, a landscape of growing geopolitical tensions, and concerns about the Chinese economy.
The current risk posed by emerging markets, due to increasing debt, has caused investors around the world to start withdrawing their money. According to data from investment flow portal EPFR, collected by Morgan Stanley, capital outflows reached $14 billion this year.
Sovereign bonds in 2024
Despite the difficulties, there have been no defaults on the part of governments. Additionally, thanks to the involvement of the International Monetary Fund and the return of some borrowers to international capital markets, subject matter experts RBC BlueBay Asset and Morgan Stanley believe there will be no default either sovereign next year.
These fundamental elements contributed significantly to resolving debt negotiations that had been deadlocked for years. In this case, we have seen a decline in the debt of some countries facing economic difficulties, riskier bonds, such as those of Pakistan and Egypt, have outperformed compared to others, since, as the debt situation improves, investors are more attracted to the bonds of these countries, which increases their value.
Data from international news agency Bloomberg confirms that among high-yielding sovereign dollar bonds in emerging markets, the top 10 performers have seen an average gain of 55% this year, providing investors with a higher return. On the other hand, the high yield debt index was significantly higher than the investment grade bond index.
However, a number of factors, such as rising interest costs and the maturity of loans taken out during the pandemic, have led fund managers to question the ability to maintain such stability. For his part, Anthony Keitel, senior portfolio manager at RBC, said: “The risk of default is lower in the short term, but if we look a little further out, the question is whether they can pay these costs.
A debt of 29,000 billion dollars
According to the annual debt report of the United Nations Conference on Trade and Development (UNCTAD), emerging market debt has doubled over the past decade to reach approximately $29 trillion.
The aforementioned debts have left countries with a heavy burden of large interest payments and bond maturities to be repaid or refinanced. According to JPMorgan Chase, approximately $190 billion in foreign bonds will mature over the next two years, which could destabilize the financial management of these countries, as they will have to find ways to repay or refinance these debts to avoid new economic tensions.
To replenish these maturities and access international debt markets, some of the most at-risk countries are already paying more than 9% interest on their bonds.
In November, S&P analysts said they expected more defaults over the next decade than in previous years. At the same time, the World Bank said interest payments could reach unprecedented levels for poor countries.
Meanwhile, investors, who have already been affected by post-pandemic defaults, are already seeing the negative prospect of a new wave of emerging market debt defaults, with Ethiopia the latest developing country to find itself in default of payment by the end of 2023.
The IMF under pressure
The International Monetary Fund is negotiating with Argentina, one of its largest debtors, which hopes to reach an agreement before the end of the year to modify and probably expand the current $44 billion deal. It is worth remembering that Argentina has already defaulted on its debt repayments nine times and that, for the coming year alone, its hard currency bond debt will amount to some $9 billion.
The IMF has also already begun bailing out Asia, helping to increase Sri Lanka and Pakistan’s debt by 34% and 43%, respectively, this year. For its part, Angola attempted to begin discussions with the IMF on a new initiative, but then indicated that the Fund would continue to provide technical assistance for the time being.
According to Morgan Stanley strategists including Emma Cerda and Simon Weaver, about 27% of emerging market debt ratios are linked to the IMF, and the number of countries dependent on the Fund’s programs is expected to increase further in the coming years, adding that “the IMF will continue to play a key role”, and that they continue to believe that “a large part of the upcoming programs that end will be refinanced largely due to budgetary concerns”.
