"Default Risk in Over 10 Emerging Countries"

FT Warns Ukraine, El Salvador, and Others

[Asia Economy Reporter Park Byung-hee] A warning has emerged that the risk of default is increasing for more than 10 emerging countries due to multiple adverse factors such as the Russia-Ukraine war, inflation, and the US interest rate hikes.

The Financial Times (FT) recently reported, analyzing Bloomberg data, that many countries are experiencing a rise in sovereign foreign currency bond yields this year, increasing the risk of national default. FT specifically identified 10 countries with high default risk: Ukraine, El Salvador, Sri Lanka, Argentina, Pakistan, Ghana, Kenya, Nigeria, Ecuador, and Egypt.

The yield on Ukraine's 10-year foreign currency-denominated sovereign bonds has risen nearly 35 percentage points this year, currently standing at 43.7%. Ukraine's fiscal deficit increased from about $5 billion per month at the start of the war to $9 billion per month, accelerating the pace of increase. Ukraine must repay $1.4 billion in bond principal and interest by September 1. Last week, the state-owned energy company Naftogaz requested a debt payment deferral, heightening concerns about a Ukrainian default. The Ukrainian government is reportedly considering whether to request debt restructuring before September 1.

President Volodymyr Zelensky has emphasized fulfilling debt principal and interest repayment obligations to maintain trust with the international community. This was because the post-war reconstruction requires enormous costs, and maintaining trust with the international community is crucial for smooth financing of reconstruction costs, but it appears to have reached its limits.

Bond yields for El Salvador and Sri Lanka have also risen nearly 20 percentage points this year, currently at 33.9% and 37.4%, respectively.

Although emerging market bond yields typically show high volatility, this time multiple adverse factors have overlapped, leading to concentrated sovereign bond sell-offs centered on specific countries. According to JP Morgan Chase, $52 billion has been net withdrawn from emerging market bond funds this year. This net outflow is larger than in 2015, when emerging markets were severely shaken by concerns over the Chinese economy, and is the largest in the 17 years for which JP Morgan Chase holds related statistics.

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), said last week, "The situation of countries in economic crisis is worsening, including 30% of emerging countries and 60% of low-income countries."

However, some analysts argue that the current emerging market crisis is limited to individual countries and the risk of spreading across emerging markets as in the past is low. This is because resource-rich emerging countries, including Middle Eastern oil producers, are benefiting, and many emerging countries have improved fiscal soundness after experiencing multiple crises in the past. Some emerging countries, such as Brazil, have already proactively raised benchmark interest rates significantly since last year to prepare for US tightening.

This content was produced with the assistance of AI translation services.