Apr 24, 2023 - Economy

The debt overhang facing frontier markets

Note: Based on data for 17 frontier markets (MSCI classification); Source: Capital Economics, Bloomberg; Chart: Axios Visuals
Note: Based on data for 17 frontier markets (MSCI classification); Source: Capital Economics, Bloomberg; Chart: Axios Visuals

Frontier-market countries owe billions in debt payments over the next few years.

Why it matters: The backdrop for sovereign debt restructurings is increasingly fraught. And the ranks of those in need of restructuring could grow if any of these countries can't make their upcoming payments.

The background: China, one of the largest creditors to low-income nations, has resisted signing on to any deals that involve not getting paid back in full. Zambia, for example, has sat in default for over two years.

  • Be smart: Accepting a "haircut" — the term for when a lender doesn't get fully repaid — is the only way to move forward in a situation where a borrower simply can't pay back all the debt.

State of play: The debt stalemate between China and Western creditors, once discussed in hushed tones in the halls of global finance, has more recently spilled out into the open.

  • Just last week, Treasury Secretary Janet Yellen addressed it directly: "China’s participation is essential to meaningful debt relief. But for too long, it has not moved in a comprehensive and timely manner. It has served as a roadblock to necessary action," she said in a speech about the U.S.-China economic relationship.

The impact: "Zambia’s debt overhang has held back critical public and private investment and depressed economic development," Yellen said.

  • "But Zambia is not the only country in this situation. The IMF estimates that more than half of low-income countries are close to or already in debt distress."

The intrigue: The impasse could affect more than just the countries who've already defaulted; it could also chill future lending, wrote William Jackson, chief emerging markets economist at Capital Economics, in a recent research note.

  • "Western lenders may become more reluctant to lend to countries that are heavily indebted to China, fearing that any eventual sovereign default would be protracted and messy," Jackson wrote.

What we're watching: Kenya is among the countries with fragile finances that's facing a large external debt payment next year — and has sizeable exposure to China as a lender.

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