Interest rate inflation: emerging markets struggle with a 29 trillion dollar debt burden
According to the United Nations, a record 54 countries are spending more than 10% of their income on interest payments on debt accumulated over a decade

Adriana Icaza
31/12/24

With a turbulent 2025 in sight, emerging countries are bracing themselves for a growing burden of responsibility as a result of soaring interest payments on the 29 trillion dollar debt accumulated over the last decade.

The latest figure confirmed by the UN is an unprecedented record: 54 countries spend more than 10% of their income on interest payments, while in countries such as Pakistan and Nigeria, more than 30% of their income is spent on debt interest payments alone.

These drastic increases in domestic and external debt have reached around 850 billion dollars last year, forcing nations to redirect funds for domestic spending on hospitals, roads and schools, in turn increasing risks for investors in emerging markets.

The WB and IMF predict a geopolitics-dependent 2025

In this regard, S&P Global’s head of global sovereign ratings, Roberto Sifón-Arévalo, said in an interview that ‘the interest burden is huge, there is a lot of uncertainty, but the stakes are high’.

While this challenge may be daunting, it is not solely responsible for the start of an uncertain year for emerging markets. Other factors are also setting the stage for an unsettled 2025: the return of the Trump administration and its specific outlook for US interest rates and the dollar, a landscape of rising geopolitical tensions, and concerns about the Chinese economy.

The current risk posed by emerging markets, due to rising debt, has caused investors around the world to start withdrawing their money. According to data from the investment flows portal EPFR, collected by Morgan Stanley, debt outflow figures reached 14 billion dollars this year.

Logo of the International Monetary Fund (IMF) at its headquarters in Washington, USA. – REUTERS/YURI GRIPAS
Sovereign bonds in 2024
Despite the difficulties, there were no sovereign defaults by governments. Moreover, thanks to the involvement of the International Monetary Fund and the re-entry of certain borrowers into the international capital markets, experts in the field, RBC BlueBay Asset and Morgan Stanley believe that there will be no sovereign defaults next year either.

These fundamentals helped, significantly, to resolve debt negotiations that had been stalled for years. In this case, we saw a decline in the debt of some countries facing economic difficulties, riskier bonds, such as those of Pakistan and Egypt, have outperformed compared to others, since, as the debt situation improves, investors are more attracted to the bonds of these countries, increasing their value.

Data from the international news agency Bloomberg confirms that, among high-yielding emerging market dollar sovereign bonds, the 10 best-performing ones have averaged a 55% gain this year, offering investors a higher return. On the other hand, the high yield debt index has been significantly higher than the investment grade bond index.

However, a number of factors, such as rising interest costs and the maturity of pandemic-era borrowing, have led fund managers to question the ability to sustain such stability. For his part, RBC senior portfolio manager Anthony Keitel said: ‘The risk of default is lower in the short term, but if we look a bit further ahead, the question is: can they pay these costs?

A debt of 29 trillion dollars
In line with this, emerging market debt has doubled to around 29 trillion dollars over the past decade, according to the annual debt report of the United Nations Conference on Trade and Development (UNCTAD).

The debts seen above have left countries with a heavy burden of large interest payments and bond maturities to be repaid or refinanced. According to JPMorgan Chase, about $190 billion in foreign bonds will mature in the next two years, which could destabilise the financial management of these countries, as they will need to find ways to pay off or refinance these liabilities to avoid further economic stress.

To replenish these maturities and access international debt markets, some of the most credit-risky countries are already paying more than 9% interest on their bonds.

In November, S&P analysts indicated that more defaults are expected over the next decade than in previous years. At the same time, the World Bank said that interest payments could reach unprecedented levels for poor countries.

Meanwhile, investors, who have previously been affected by post-pandemic defaults, are already seeing the negative prospect of a new wave of emerging market debt defaults, with Ethiopia the latest developing country to default by the end of 2023.

The IMF’s optimism is contradicted by the Algerian economy’s low economic indicators

Pressure mounts on the IMF
The International Monetary Fund is negotiating with Argentina, one of its main debtors, which hopes to reach an agreement before the end of the year to change and probably expand the current 44 billion dollar arrangement. It should be remembered that Argentina has already defaulted nine times on its debt repayments, and that in the coming year alone it has a hard currency bond debt of some 9 billion dollars.

Headquarters of the International Monetary Fund (IMF) – REUTERS/YURI GRIPAS
The IMF has also already begun its bailout in Asia, helping to boost the debt of Sri Lanka and Pakistan by 34% and 43%, respectively, this year. For its part, Angola tried to start talks with the IMF on a new initiative, but then indicated that the Fund would continue to provide technical assistance for the time being.

According to Morgan Stanley strategists, including Emma Cerda and Simon Weaver, about 27% of the emerging market debt ratio is tied to the IMF, and the number of countries relying on Fund programmes is expected to increase further in the coming years, adding that ‘the IMF will continue to play a key role’, and that they continue to believe that ‘a large portion of the upcoming programmes that will end will be refinanced largely due to fiscal concerns’.