S&P said there will be more sovereign defaults in emerging markets

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Sovereign defaults will become more frequent over the next decade as poorer countries grapple with heavy debt burdens and a legacy of high borrowing costs, according to S&P Global Ratings.

Although global interest rates are currently on the decline and countries such as Zambia and Sri Lanka have finally emerged from default, many countries still have little resources to service. foreign currency debt and little access to capital.

“Due to higher debt and increased borrowing costs for hard currency debt. . . Sovereign countries will default more often on foreign currency debt in the next 10 years than in the past,” the rating agency said in a report.

The warning comes as many countries are trying to emerge from a default battle to secure deals from increasingly disparate groups of creditors and access enough relief to avoid another debt crisis.

Indebted countries including Kenya and Pakistan narrowly avoided default thanks to new IMF bailouts and other loans this year. But in reality, they remain locked out of the bond market to refinance their debts, given the double-digit borrowing costs that many similar governments face.

Ghana this month emerged from default by completing a restructuring of its US dollar bonds, imposing a 37% writedown on creditors. Earlier this year, Zambia ended a four-year restructuring saga, while Sri Lanka’s new government is expected to soon finalize a deal to end bond defaults by 2022.

Ukraine also concluded a debt restructuring of more than $20 billion – the largest since Argentina in 2020 – replacing a suspension of payments granted after Russia’s full-scale 2022 invasion.

However, Zambia, Sri Lanka and Ukraine have agreed to increase payments on restructured bonds if they meet their economic targets in coming years, complicating the level of relief they will ultimately need. or receive.

According to Frank Gill, Emea sovereign expert at S&P Global Ratings, emerging countries have lower ratings after the debt restructuring process than before. “That points to the possibility of repeat defaults.”

The extent of default also depends on countries’ financing choices and the extent to which they can attract foreign capital, such as foreign direct investment, to help offset their deficits, Gill added. current account deficit. But there are few signs of big increases later, he said.

S&P Global Ratings said that while there were no early warning signs of a sovereign default, it found that governments spent an average of a fifth of their revenue on interest payments in the year before They stopped paying their debts.

Countries facing large debt maturities relative to reserves next year include the Maldives, which recently received bailouts from India and Argentina.

Argentina’s government says it can find dollars to meet about $11 billion in foreign bond payments next year, despite limited access to global markets, pressure on reserves and Imminent payments on IMF loans.

Last month, President Javier Milei also approved The decree allows the exchange of mature debt into new debt at market interest rates without prior approval from the legislature.

Giulia Filocca, senior sovereign ratings analyst at S&P, said that over the next decade, the rise in such buybacks and similar activities will mean “the nature of defaults can become much more unique.”

“Increasingly we are seeing buybacks that may not look like a default,” she said, but the agency could classify it as a troubled exchange if it was done to avoid default. completely.