Developing world faces $2.5trn shock as Ghana behaves like rich sultanate in the gulf
Although there has been a small rally in the bond market in recent weeks, distressed debt in emerging markets remains a serious weak spot in a global economy preparing for recession.
Governments in developing countries need to refinance $215 billion of debt coming due in the next two years.
But many can no longer borrow. Among those most exposed to distressed debt are asset managers such as Allianz SE, BlackRock Inc and Fidelity Investments.
“We expect the borrowing conditions for emerging markets to stay difficult and rates to remain high,” said Guillermo Osses, head of emerging-market debt strategies at hedge fund manager Man GLG, which has run the best performing EM fund this year.
Around 15 countries have sovereign bonds trading at distressed levels, and there is no option for them to refinance the current level of debts at these rates. They will have to either go to
the IMF, devalue their currencies or restructure the debt.”
Along with dozens of other developing countries Ghana benefited from a debt-relief initiative run by the IMF and World Bank in the early 2000s, which wiped about $4 billion off its debt stock by 2006. That shift from mostly concessional funding before 2007 to largely commercial borrowing afterwards was transformational for Ghana, says Bright Simons, an analyst at the Accra-based think tank Imani Centre for Policy and Education.
“This new source of funding was completely different from what we’d experienced in the past — this money was going directly to the budget like a steroid injection straight into
the bloodstream,” said Simons.
The cathedral “is the perfect example of the spending spree: Ghana behaving like a fabulously rich sultanate in the Gulf rather than a developing country just attaining frontier market status.” Erasing the ‘stigma of default’ Ghana spent years pitching itself as a business-friendly country that offered political stability, and a place for foreign investors to make outsized returns that they would easily be able to repatriate.
Foreign Direct Investment soared to nearly $4 billion in 2019, regularly outstripping neighboring
Nigeria, which has an economy over five times larger.
But, as Simons notes, Ghana’s FDI-stock-to-GDP ratio of nearly 80% — compared with a continental average of around 25% — makes it “highly vulnerable to global shifts in sentiment.”