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Emerging economies struggle to service debts as growth stalls and rates rise

The World Bank has issued a stark warning that developing countries face mounting challenges paying back loans as borrowing costs surge and economic expansion slows across the globe.


In its starkest caution yet on emerging market debt sustainability, the multilateral lender stressed the urgent need to accelerate growth to service debts in a higher interest rate environment.


When it comes to borrowing, the story has changed dramatically. You need to grow much faster,” said Ayhan Kose, deputy chief economist at the World Bank.“If I had a mortgage with a 10% interest rate, I would be worried,” he added.


Kose suggested achieving sufficiently high real GDP growth, over real borrowing rates, could prove difficult for many countries already saddled with sizable debts.


Emerging market governments raised a record $47 billion selling international bonds in January, per Institute of International Finance data. While safer developing economies issued at reasonable rates, riskier Kenya paid over 10% - a level often deemed unaffordable.

With advanced economy rates rising, the World Bank expects the weakest five-year average global growth since the early 1990s amid slowdowns across emerging and developed markets.


Kose warned sustaining lackluster expansion would make it “nearly impossible” for poorer nations to meet pressing spending needs from healthcare to education. It also jeopardizes funding for the UN Sustainable Development Goals. 


The growth squeeze comes as world debt scales new highs. Global debt rose by $20 trillion in 2022 to a record $313 trillion, according to the IIF. Developing country debt-to-GDP ratios also hit all-time peaks, indicating potential strains.


If growth fails to accelerate, some emerging economies may need to restructure debts, said Kose. This could involve maturity extensions and creditor haircuts. However global progress on frameworks to guide restructurings remains slow.


The World Bank official cited the failure of the G20 Common Framework initiative launched in 2020 to speed up negotiations between indebted emerging economies and creditors. For example, Zambia has remained in default for over three years without a settlement.


"Trade has been a critical driver of poverty reduction, and obviously for emerging markets economies, a critical source of earnings," Kose said.

Kose warned the outlook could darken further if geopolitical tensions like the Middle East conflict continue escalating. This would pile pressure on emerging market finances on top of tight monetary policy, weak trade, capital outflows, and currency depreciations.






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