Massive Interest Burden Haunts $29 Trillion Emerging Debt Pile
Developing nations, already set for a turbulent 2025, are having to cope with ballooning interest payments on $29 trillion of debt that built up over the last decade.
A record 54 countries are spending more than 10% of their revenues on interest payments, according to the United Nations. Some, including Pakistan and Nigeria, are using more than 30% of revenue just to pay coupons.
The sum — around $850 billion in total last year for both foreign and local debt — is forcing countries to divert money from domestic spending on hospitals, roads and schools while raising risks for emerging-market investors.
“Interest burdens are massive,” Roberto Sifon-Arevalo, global head of sovereign ratings at S&P Global Ratings, said in an interview. “There’s a lot of muddle through, but there’s a tremendous amount of risk.”
It’s an additional challenge in a year of uncertainty for emerging markets. Donald Trump’s impact on the outlook for US rates and the dollar, heightened geopolitical tensions and concerns over the Chinese economy all set the stage for a bumpy 2025.
Global investors are already yanking their money, with outflows from vehicles focusing on hard-currency EM debt this year topping $14 billion, according to EPFR data compiled by Morgan Stanley.
Despite that, governments managed to squeak by without a single sovereign default in 2024. Emerging-market watchers including RBC BlueBay Asset Management and Morgan Stanley don’t expect any nations to go bust next year either, largely because international institutions including the International Monetary Fund are stepping in and international capital markets reopened for some borrowers.
The backdrop has helped settle debt negotiations that had been stalled for years. Fewer countries are trading at distressed levels and some of the world’s riskiest bonds, from Pakistan to Egypt, have beaten peers.
All of the top 10 performers in a broad-based gauge tracking sovereign, emerging-market dollar notes are from the high-yield space, averaging a 55% return this year, according to data compiled by Bloomberg. And an index of high-yield debt is far outperforming that of investment-grade notes.
But as pandemic-era borrowings begin to come due and interest costs build, money managers are asking how long can the lull last.
“Default risk is lower in the short term,” said Anthony Kettle, senior portfolio manager at RBC. “But it does set up an interesting situation if you look a little further forward: Can they sustain these interest costs?”
Emerging-market debt has more than doubled over the past decade to roughly $29 trillion, most of which came from local borrowing, according to UNCTAD’s annual debt report.
That’s left them saddled with big interest payments as well as bond maturities that will either need to be paid or refinanced. Over the next two years, roughly $190 billion of obligations comes due on foreign bonds, according to JPMorgan Chase & Co.
Already some of the riskiest countries are paying more than 9% coupons to tap international debt markets and roll over maturities.
S&P analysts wrote in a report last month that they expect more defaults over the next decade than in the past, due to debt levels and the cost of borrowing. The World Bank also recently warned of record-high interest payments by poor countries.
Risky Outlook
The possibility of another wave of busts underscores the risky outlook for EM debt investors, who were stung by a series of defaults after the pandemic. Ethiopia was the last developing nation to renege on debt payments in late 2023.
Pressure is mounting on the IMF to continue stepping in. The Fund is in talks with Argentina, one of its biggest debtors, for a deal by year-end to replace and possibly expand the current $44 billion agreement.
Argentina, which has defaulted a staggering nine times, faces some $9 billion due between interest and principal payments on its hard currency bonds next year alone.
In Asia, the IMF has already bailed out Sri Lanka and Pakistan — helping propel the debt of those countries by an eye-popping 34% and 43% this year. Angola in October floated the idea of kicking off talks with the IMF on a new program, but later said that for now the Fund will keep providing technical assistance.
About 27% of an emerging-market debt index is engaged with the IMF and the number of countries relying on the fund’s program should rise further, according to Morgan Stanley strategists including Emma Cerda and Simon Waever.
“The IMF will still play a key role,” Morgan Stanley strategists wrote in a note on Dec. 3. “We still think that a large share of upcoming programs ending will be refinanced largely due to fiscal concerns.”
