The average family in Ghana pays two-thirds of what it paid last year for diesel, flour and other necessities. In Egypt, wheat is so expensive that the government has taken half a billion dollars from its budget to subsidize the bread it provides to its citizens. And Sri Lanka, already struggling to control a political crisis, is running out of fuel, food and medical supplies.
A strong dollar makes problems worse.
Compared to other currencies, the US dollar is the strongest in two decades. It is rising because the Federal Reserve has raised interest rates sharply to combat inflation and because the health of the US economy is better than most. Combined, these factors have attracted investors from all over the world. Sometimes they simply buy dollars, but even if investors buy other assets, such as government bonds, they need dollars to do so – and in each case they revalue the currency.
That strength has become a large part of the world’s weakness. The dollar is the de facto currency of world trade, and its sharp rise is putting pressure on dozens of low-income countries, especially those that rely heavily on food and oil imports and borrow in dollars to finance them.
“We live in a world with little fires everywhere,” said Mohamed El-Erian, president of Queen’s College, part of Cambridge University, and former CEO of Pimco, the $2 trillion bond manager. “If we don’t pay attention, these little fires could get much bigger.”
High food and energy costs from Russia’s war with Ukraine were already hurting some emerging market countries. The rising dollar, whose strength is measured against a basket of currencies that are America’s major trading partners, has exacerbated these problems by making importing vital commodities using weak currencies more expensive.
A strong dollar forces countries to use more of their currency to buy the same amount of goods. This higher price means that they are inadvertently importing more inflation along with grain and fuel. Because they borrow in dollars, they have to pay interest in dollars, adding to their financial hardship.
Some countries are already in default mode. Others are teetering on the edge of a precipice. The sovereign debt crisis may soon spread, hampering the fragile recovery from the pandemic and raising the possibility of a severe global downturn.
“Things look a bit shaky at the moment,” said Leland Goss of the International Capital Markets Association, a trade body. “There seems to be a consensus that we could be facing for the first time in a while, not one country but a whole group of countries on their way to restructuring.”
Four emerging market countries have defaulted on their debts so far this year, according to S&P Global ratings – Russia, Sri Lanka, Belarus and Ukraine. Ten others are under “extreme stress” – Argentina, Lebanon, Ghana, Suriname, Zambia, Ethiopia, Burkina Faso, the Republic of Congo, Mozambique and El Salvador, according to the rating agency. Of the 94 emerging market sovereigns averaged by Standard & Poor’s worldwide, more than a quarter have a B-minus rating, a low-quality rating indicating a high-risk investment.
Part of the collateral damage from Russia’s war with Ukraine and the Federal Reserve’s fight against inflation, the bleak situation highlights the global connections that have made the fate of countries around the world so closely linked to the decisions made in Moscow and Washington.
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“We are in a fragile situation,” Mr. El-Arian said. “Country after country is flashing amber, some are already flashing red.”
Many low-income countries were already struggling during the pandemic.
Approximately 22 million people in Ghana, or a third of its population, She reported a drop in her income Between April 2020 and May 2021, according to a survey by the World Bank and UNICEF. Adults in nearly half of families with children surveyed said they skip a meal because they don’t have enough money. Nearly three-quarters of them said prices for staple foods had risen.
Then came the Russian invasion of Ukraine. The war between two of the world’s largest food and energy exporters has led to a huge price hike, especially for importers like Ghana. Consumer prices rose 30 percent in the year to June, according to data from research firm Moody’s Analytics. For household essentials, annual inflation has been 60 percent or more this year, according to Standard & Poor’s data.
To illustrate this, consider the price of a barrel of oil in dollars against the Ghanaian cedi. At the beginning of October last year, the price of oil reached $78.52 a barrel, rising to nearly $130 in March before falling back to $87.96 at the beginning of this month, a one-year increase of 12 percent in dollar terms. Over the same period, the Ghanaian cedi has weakened more than 40 percent against the dollar, which means that the same barrel of oil that cost about 475 cedis last year now costs more than 900 cedis, nearly twice that price.
Compounding the problem are the large state-funded subsidies, some of which have been taken away or increased during the pandemic, and which are now weighing heavily on government finances.
Ghana’s president cut fuel taxes in November, losing nearly $22 million in projected revenue to the government – the latest figures available.
In Egypt, spending on what the government refers to as “goods supply,” almost all wheat to support long-term bread, is expected to reach about 7 percent of total government spending this year, an increase of 12 percent — or more than half. $1 billion – from what the government has budgeted.
With costs ballooning throughout the pandemic, governments have taken on more debt. Ghana’s public debt has grown to nearly $60 billion from about $40 billion at the end of 2019, or nearly 80 percent of GDP from about 63 percent, according to Moody’s.
It is one of four countries listed by the S&P, along with Pakistan, Nigeria and Sri Lanka, where interest payments alone account for more than half of government revenue.
said Frank Gill, an analyst at Standard & Poor’s. “This is one shock that follows another.”
In May, Sri Lanka defaulted on its government debt for the first time in its history. Over the past month, the governments of Egypt, Pakistan and Ghana have reached out to the IMF for a bailout as they struggle to meet debt financing needs, and can no longer turn to international investors for more cash.
“I don’t think there’s a great deal of interest in lending to some of these countries,” said Brian Weinstein, co-head of credit trading at Bank of America. “They are incredibly weak right now.”
This weakness has already been reflected in the bond market.
In 2016, Ghana borrowed $1 billion for 10 years, and paid an interest rate of just over 8 percent. With the country’s financial situation deteriorating and investors backing down, the yield – an indication of what it would cost Ghana now to borrow money through 2026 – rose above 35 per cent.
It is an unsustainable debt cost for a country in the case of Ghana. Ghana is not alone. For bonds also maturing in 2026, yields from Pakistan have reached nearly 40 percent.
“We have concerns in terms of any country having returns which calls into question their ability to refinance in public markets,” said Charles Cohen, deputy head of the IMF’s Monetary and Capital Market Departments.
Jesse Rogers, economist at Moody’s Analytics, said the risks of a sovereign debt crisis in some emerging markets are “very, very high”. Rogers likened the current situation to the debt crises that crushed Latin America in the 1980s — the last time the Fed sought to tame soaring inflation.
Already this year, more than $80 billion has been withdrawn from mutual funds and exchange-traded funds — two popular types of investment products — that buy emerging market bonds, according to EPFR Global, the data provider. As investors sell, the US is often the beneficiary, adding to the dollar’s strength.
“It is by far the worst year for outflows the market has ever seen,” said Pramol Dhawan, Head of Emerging Markets at PIMCO.
Even citizens of some of these countries try to exchange their money for dollars, fearing what will happen and further devaluation – but they also unintentionally contribute to it.
“For the pockets of emerging markets, this is a really challenging background and one of the most challenging we’ve had for many years,” said Mr. Dhawan.