Things to watch in 2019: Debt and emerging debt crises (part 1)


First in a two-part blog series 

More than a decade after the last global financial crisis hit, the next wave of defaults is lapping at our shores. Financing conditions will become more difficult in 2019. The world’s major central banks ‘normalised’ their monetary policies last year, meaning that the times of cheap and abundant credit are over. 

Both public and private actors that borrowed heavily in recent years are finding it increasingly hard and costly to refinance their sky-high debt stocks. The number of countries at high risk of debt distress is increasing. In this overview of 2019, we look at the key crises that are threatening economies around the globe, and which countries are likely to be hit hardest…

An end to quantitative easing in Europe

The European Central Bank (ECB) terminated its net asset purchase programmes in December. Through these programmes, the ECB had helped Eurozone countries to issue and refinance debts at low interest rates since 2015. As a result, the ECB became the largest creditor in the EU, holding more than €2 trillion in government bonds. Despite the ECB’s announced it would keep interest rates low at zero per cent, the end of net asset purchases marks the end of quantitative easing in Europe. 

This policy shift comes at an awkward time as Gross Domestic Product (GDP) growth in the EU dropped dramatically to just 0.3 per cent in the penultimate quarter of 2018. Major economies like Italy and even Germany showed negative growth. Moreover, shocks through a hard Brexit, Trump-style trade wars, a waning China boom and other factors are likely to hit Europe hard in 2019. The shift in ECB policy has implications for financing conditions outside Europe too, as the liquidity created by the ECB’s quantitative easing programmes had also made borrowing elsewhere easier and cheaper. 

Cost of dollar debt rising

The USA is several steps ahead when it comes to ending quantitative easing. The US Federal Reserve Bank (Fed) raised interest rates in December to 2.5 per cent, the ninth such move since late 2015. Dollar debt has thus become expensive, which is particularly problematic for public and private debtors in developing countries that took out dollar-denominated loans when they were still cheap and easy to find. This is no longer the case and, according to the Fed’s announcements, 2019 will see at least two more interest rate hikes. 

Jubilee Debt Campaign UK recently found that yields on low and lower middle-income government debt increased by an average of 2.2 percentage points over the course of 2018 – reaching a staggering annualised rate of 8 per cent by the turn of the year. 2019 will likely see several developing countries default or – if they don’t – amassing higher debt servicing costs that represent a massive diversion of scarce public resources for the benefit of creditors and to the detriment of development spending and public service provision.

Global debt has reached record highs and is growing further 

When the last global financial crisis hit, the total debt of advanced economies had reached ‘only’ 233 per cent of GDP. By the end of 2017, this figure was 269 per cent. Even more drastic was the increase in emerging economies, where total debt surged from 113 per cent in 2007 to 176 per cent of GDP in 2017, according to data from the Bank for International Settlements. Particularly worrying is the drastic rise of corporate debt in both rich and not-so-rich countries, but particularly in China. 

Countries to watch

While the risk of crises is generally increasing, some countries face particular challenges. According to the IMF debt sustainability assessments, 32 low-income countries were in debt crises or at high risk of crisis by the end 2018. Newcomers to the list include Republic of Congo, Ethiopia and Sierra Leone. The troubles in Argentina, Pakistan and Turkey were the first signs of the upcoming emerging markets crisis caused by overlending of private or official lenders. 

Here are some more countries to watch in 2019:

  • Angola: Public sector debt reached 81 per cent of GDP by the end of 2018, according to the rating agency Fitch. The International Monetary Fund (IMF) already approved a $3.7 billion three-year bailout loan. Angola is one example among many oil exporting nations affected by the drop in oil prices. 
  • Pakistan: Country coffers need approximately $12 billion for balance of payments support by the end of June. Pakistan already secured $6 billion from Saudi Arabia and almost the same amount from China and the United Arab Emirates together. It is still negotiating with the IMF for more money, but is unwilling to bow to IMF’s conditions, according to the Committee for the Abolition of Illegitimate Debt (CADTM) in Pakistan. China has lent massively to Pakistan to finance projects under the Belt-and-Road-Initiative. Multilateral development banks are also high on the creditor list. 
  • Sri Lanka: The island nation is a struggling with a crisis caused by Chinese infrastructure loans, which added to an already large stock of debt from private sources, in combination with massive capital outflows. New measures to cope with volatility include restricting foreign ownership of debt, says Reuters
  • Ukraine: As the conflict continues, Ukraine has just signed a new Stand-By Agreement with the IMF and continues to be by far the largest recipient of Macrofinancial Assistance from the EU. 
  • South Africa: Faces a $170 billion foreign debt cliff and already pays a staggering 9 per cent yield on 10-year-bonds to attract investors, according to Professor Patrick Bond
  • Venezuela: Has already defaulted on a number of bonds and faces litigation by vulture funds. It can hardly restructure old debts while still under US sanctions that prevent foreign creditors from taking on new bonds. 
  • Cuba: Following the lead of Venezuela and Mozambique, Cuba made the incoming Brazilian President a welcome gift by defaulting on loans due to Brazil’s national development bank
  • Gambia: Also trying to restructure unsustainable and illegitimate debts, Gambia has just hired the Potomac group to help the country out of a debt crises that occurred when the previous president plundered state-owned enterprises. 
  • China: The elephant in the room, total debt in China has more than quadrupled since 2007, rising to 317 per cent of GDP. Corporate debt accounts for more than half of this, standing at 170 per cent of GDP in 2015. This is more than double the average ratio in advanced economies, according to an analysis by the CADTM.
  • Italy: The EU’s very own elephant in the room is Italy. Risk premiums on Italian bonds have fallen substantially since November, but everyone wonders how the end of quantitative easing and potentially rising interest rates might impact on Italy’s debt sustainability. 
  • Uganda: An interesting case as it proves that debts can cause humanitarian crises. While rated at ‘low risk of debt distress’ by the IMF, the Ugandan government will have to use more than half of government revenues in the coming years to pay debts, according to the Auditor General. 

With so many crises ongoing and more expected to emerge, it is no surprise that the topic is high up the agenda of international organisations for 2019. The global policy-making calendar offers a number of opportunities to take bold steps that could turn the tide and stop these potential crises from escalating any further. 

Read our next blog to find out more about key moments on the 2019 calendar.