Developing countries will need US$ 2.5 trillion by 2026 to cover their foreign debt

The findings published by the Paris-based think tank and backed by the Bill & Melinda Gates Foundation assume that interest rates will rise by 400 basis points from 2019 levels and that currencies will depreciate by 10% against to the dollar. It assessed conditions in 113 countries, but did not include China or Russia because the data was not available.

“Current financing costs make debt service difficult to sustain, with an expected peak in 2024-25″, according to the authors of a paper based on the model titled The Coming Debt Crisis. “If such conditions held, a significant liquidity crisis would quickly turn into a generalized solvency crisis.

Developing countries, with weaker sources of income, have been hit hardest by interest rate hikes and increased lending—because of shocks including the COVID-19 pandemic and the invasion of Russia to Ukraine—which have driven up world food and energy prices. A larger share of the poorest countries’ debt is now owed to commercial lenders, who offer shorter maturities, and capital markets have been largely closed to many governments.

Those nations’ total debt stock is expected to rise to $4.3 trillion in 2026, from $2.9 trillion last year and $2 trillion in 2016, they said. Charles Albinet and Martin Kesslerthe authors of the article.

Under the scenario, 35 countries would cross what they called “debt service risk thresholds”, compared to the current 22, and the number in sub-Saharan Africa would increase from 10 to 18.

Low-middle-income countries, a category that includes nations from Ghana to El Salvador, would see their median debt-service-to-income ratio rise from 10% to 15% in 2020, an amount that for some nations would exceed their health and education budgets.

Some countries could hit so-called debt walls as payments come due. Sub-Saharan Africa, excluding South Africa, will see Eurobond repayments increase to between US$9 billion and US$10 billion in 2024 and 2025, compared to US$2.5 billion in 2019. Latin American nations will have to pay US$17,500 million in amortizations in 2025, compared to US$ 9,000 million in 2023.

“If current conditions continue, a widespread debt crisis could materialize, especially in sub-Saharan Africa and in lower-middle-income countries more generally.”, the authors warned.

It will be necessary to design strategies to avoid debt crises, they added.

“For many countries, the real danger comes from rising debt service. Therefore, it is essential to reduce the cost of debt and resilience to shocks.they said. “Some sort of forbearance and debt rollover will allow some respite during this shock. Building capacity to reschedule debt payments will be important”.

The amount of aid from official global development finance institutions shall “increasethey said.