Debt defaults by a country are generally infrequent, but it happens. Currently, there are several countries at higher risk of debt default. A nation begins to experience a crisis when its government cannot repay its debts. Typically, there are several factors including political instability, financial mismanagement, and economic stagnation.
Last year, for the first time, Sri Lanka, a South Asian nation, defaulted on its debt in May. The Sri Lankan government was given a grace period of almost a month to repay around $78 million in unpaid interest, but the government failed. Sri Lanka’s debt default raises questions about its financial future and alarms other countries at high risk to take heed.
Let’s have a look at a few of those countries.
Economic Earthquake Coming!” 12 Nations Whose Debt Could Topple the World’s Balance
- El Salvador
- South Africa
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Egypt is one of those nations that mainly depend on tourism in terms of economy. Egypt suffered severely during the COVID-19 era, like every other tourism-dependent nation. The rapid increase in energy and food prices left the nation with minimum dollars. The Egyptian government has struggled to repay their loans since the Covid-19 lockdowns.
Over the next five years, Egypt has to pay an estimated debt of around $100 billion. Egypt is still facing loss in its foreign exchange reserves and destructive economic activity due to import and currency restrictions.
Considering the economic crisis, Ghana is at the highest risk of getting default on its debts soon. In a generation, Ghana is the only nation that spent more than 40 percent of its revenues on repaying debts last year.
The West African nation has above 90% higher debt-to-GDP ratio. In 2022, Ghana’s currency lost around 1/4th of its value while spending most of its tax revenues on loan payments. The nation is also suffering from 30% of inflation recently.
Currently, El Salvador suffers from stagnating economic growth. Although El Salvador repaid the bond payment of $800 million in January this year, it is still at high risk of debt default in a couple of years.
The nation still has to pay around $367 million, and interest is due in January 2025. El Salvador’s fiscal policies, financing plans, and high debt costs have taken its bonds to depressed securities. Experts believe that extremely low reserves and unsustainable public debt may set off financial crises before 2027.
Africa has a couple of countries that might seek help from the IMF, but Tunisia has a higher risk of getting default on its debt. Recently, Tunisia has been suffering from a severe economic crisis.
Even the financial suffering includes a lack of food storage and other necessities. As per findings, Tunisia expected to seek around $1.9 billion loan from the IMF at the start of this year. The nation offered an exchange for their unpopular reforms, including energy subsidies and food cutting.
Malawi, a country in southeastern Africa, has low economic growth and depends mainly on donations. The donor-dependent country needs help with a shortage of foreign exchange and a budget deficiency of around $1.30 billion.
The Southern African nation is trying to rebuild its debt while seeking more loans from the IMF that it might get by the end of this year. Additionally, the finance minister of Malawi seemed optimistic regarding restructuring the country’s debt soon after receiving IMF funds in November.
However, to secure IMF funds, Malawi needs assurance letters from its top donor countries, India and China.
Ukraine has 55% of the cumulative probability of default. During Russia’s invasion last year, Ukraine requested a two-year freeze of all its debts, which is more than $20 billion. Ukraine referred to the permanent debt-freezing plan as a liability management exercise.
Upon the request of the Ukrainian government, all the creditors got ready for the payment suspension and encouraged bondholders to accept Ukraine’s request for a permanent debt freeze. The donor-dependent nation may survive the risk of debt default this year, but the war-torn country also lacks necessities and dire need of foreign aid.
Argentina is one of the most defaulted countries in the world. It has defaulted on its debts around nine times since its independence. Rapid inflation is the main reason for Argentina’s frequent default, as inflation results in currency devaluation.
There’s no doubt that Argentina’s economy is hanging by a thread even after restructured debt and is at risk of getting debt default again. Investors are optimistic about Argentina’s upcoming debt default, as the nation has been unable to maintain its foreign reserves.
Factors contributing to Argentina’s risk of debt default include limited access to foreign capital markets, political instability, and economic destruction.
Recently, Pakistan has experienced months of economic and political turmoil, which got even worse by last year’s floods and rising inflation. Political instability is also adding to the defauly risk.
As per Pakistan’s debt-to-GDP ratio, there is a 70% chance of debt default. Around 40-50% of its government revenues are also reserved for this year’s interest payment only. Pakistan was relieved during its acute balance of financial crises due to the $1.8 billion funds China credited.
Although Kenya has a sustainable public debt, it stays at a high risk of debt default. Kenya spends around 20-30% of its government revenues on interest payments, due to which half of its bonds’ value has yet to be recovered.
Currently, Kenya can’t access any capital market. Kenya has an upcoming bond payment of 2 billion dollars due in 2024. The government is facing an increase in debt repayments, increasing taxes.
Since the outbreak of the Coronavirus pandemic, several factors have contributed to weakening Ethiopia’s economy. Ethiopia’s remittances were reduced due to the effects of the pandemic on its exports. It may soon need an IMF bailout.
Ethiopia also suffered from civil war in 2020. It destroyed critical infrastructure industries. The government of Ethiopia spent an estimated $19-20M per month for export revenues during the civil war. Currently, Ethiopia is suffering from 30% inflation.
Nigeria’s debt issue is due to its inability to hold enough revenue to repay its debt and fulfill other significant needs. Nigeria is considered the biggest economy in Africa, which might head towards default, economists believe.
The country has massive borrowing to capitalize on its budget deficit of around 371% in 7 years. A World Bank report suggests Nigeria paid around 97% of its revenue into interest payments only. It means the capital, overheads, and salaries need to be borrowed.
South Africa is also listed among the countries at risk of debt default. The government is continuously increasing its debt repayment and interest rates, resulting in difficulty in financing its budget deficit for South Africa.
It is not a big deal to borrow funds to finance budget deficits or infrastructure. However, the continuous growth of budget deficits is hurting the country. South Africa’s budget deficit keeps growing due to the debt interest payment, which is more than the government revenue, making it vulnerable.
Some of the above-listed countries may eventually default on their debt. However, any country’s economic or political growth can only be predicted. Stable political conditions and better management often lower the chance of default.
Most of these countries can generate more revenue, reduce massive borrowing, and produce enough to finance their budget deficit and pay their debt interest, decreasing their chance of defaulting on their debts.
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