As vaccine rollouts marched on in the United States, China and the United Kingdom and finally found their footing in Canada and across Europe, in much of the developed world discussions have turned towards when things will “return to normal.” With scenes of revellers returning to British High Street pubs and fans snagging foul balls at baseball games across the U.S., normal doesn’t seem far away.  

Yet, in India, Brazil, Argentina and many other emerging markets, the prospect of “normal” remains far off as COVID-19 continues to cause devastation to people and economic outlooks. While this suffering is being reported and covered in industrialized economies, it hasn’t dampened the growing optimism in those countries. Awkwardly, as the outlook improves in the U.S. and Europe, it has the potential to increase the problems facing emerging countries as they struggle to contain the virus.  

The root of this issue can be traced back to the 2008 financial crisis when many emerging market governments and corporations took advantage of historically low interest rates and issued new debt, feeding demand from investors across global capital markets starving for yield. While this marriage increased the integration of emerging markets with global markets, it was part of a wave of new debts being issued globally as global debt issuance skyrocketed by more than US$52 trillion between 2016 and 2020, according to estimates from the International Institute of Finance (IIF).

Although at least $15 trillion of that was recorded because of COVID-19 in 2020, the remaining $37 trillion surpassed the $6 trillion increase between 2012-2016. At the same time, while emerging market governments were offering to pay higher interest rates on their debt than governments in industrialized economies, the average share of government revenues consumed by interest costs was around 7%, or roughly the same level as in 2005-2006.

While this fit between investors and emerging markets helped both, for emerging market governments this tidal wave of debt—often issued in foreign currencies—ratcheted up their exposure to global interest rates and most importantly, the U.S. economic outlook. The consequence of this unintended connection to the U.S. outlook became apparent as the Federal Reserve shook off its inertia and began to march U.S. interest rates higher at the end of 2015. As the decision rippled around the globe and increased rates, Egypt, Turkey, Argentina, South Africa, and Pakistan began to find their expanded debt loads unsustainable. 

The emergence of COVID-19, and its disastrous consequences around the world, threw the progress of interest rates into reverse, with the U.S. Fed Funds rate falling from 2.4% in June 2019 to its effective lower bound of 0.1% by April 2020, with other rates similarly collapsing. 

While this break allowed government space to issue debt to backfill revenues lost due to COVID-19 and focus on controlling the virus, this return to “normal” in the U.S. and other industrialized countries in the second half of 2021 threatens that interest rates will also start to rise. All while emerging market countries struggle to control COVID-19 and ramp up vaccination campaigns. With the IIF estimating that nearly $7 trillion in emerging market debt coming due by the end of 2021 and U.S. dollar debt accounting for 15% of that, the pressure on countries could be significant. 

According to Export Development Canada forecasts of government debt as a share of their economies and the ratio of interest cost to revenues, Egypt, Ghana, Sri Lanka, and Pakistan are at risk of facing a new round of fiscal stress if global interest rates pop. Beyond that group of countries is a much larger group that could struggle to refinance debts in the coming years as the world gets back to normal and their debts come due.

The bottom line?

While the start of 2021 saw many countries struggling to get a handle on COVID-19, the world has started to pull apart. The increasing economic confidence and strength of the U.S., U.K. and across Europe will put pressure on emerging markets, even as they continue to face their own prolonged COVID-19 crises. The risk of countries facing economic or debt distress increases along with global interest rates. Monitoring these evolving country risks and economic developments will help you understand the world’s road to recovery and EDC’s Country Risk Quarterly can help keep you informed. 


This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.