Macro Analysis /

Debt sustainability after Covid: The markets most at risk

  • Covid has raised concerns about debt sustainability which were at a high pitch in frontier markets even pre-pandemic

  • Our framework for assessing debt and liquidity risks shows which countries could be at the greatest risk of distress

  • Download our detailed presentation to see which markets are most vulnerable and why

Debt sustainability after Covid: The markets most at risk
Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

Tellimer Research
21 July 2021
Published byTellimer Research

Public debt has risen around the world in response to Covid, due to widening budget deficits as governments have faced higher spending needs amid lower revenues. In frontier markets (FM), public debt rose several percentage points last year, a bigger increase than we saw during the global financial crisis, rising to c50% of GDP. This has raised concerns about debt sustainability, which were already at a high pitch in FM even before the pandemic.

General government debt (% of GDP)

The pessimistic argument is that: compared with emerging markets (EM), which saw an even bigger rise in public indebtedness, FM may be less well equipped to deal with the rise in debt and carry higher debt loads. But with low (and potentially low for long) global interest rates, the optimistic argument is that debt is more affordable – implying low debt service costs.

How FM governments manage this will be crucial. Besides stronger growth, to help countries grow out of debt problems, which may be in doubt post-Covid, ensuring debt sustainability will hinge on fiscal consolidation; although favourable debt structures may also help. However, ensuring credible and durable fiscal adjustments will be a challenge for some.

Tellimer’s framework for assessing debt and liquidity risks (see our new data product) highlights Sri Lanka, Tunisia, Jamaica, Bahrain, Kenya, Ethiopia, Egypt, Laos, Ghana and Mongolia as among the most vulnerable countries, although this isn’t to say that all of these at a high risk of default.

The huge – even unprecedented – official sector financial response will, though, help mitigate some of these risks. This comprises traditional IMF lending, a global liquidity injection and cashflow relief for poor countries.

Biggest beneficiaries of SDR allocation among EM countries with eurobonds

And, despite all this, still relatively benign emerging market financing conditions should also help most FM governments manage the adjustment process; although idiosyncratic risks and the risk of 'sudden stops' remains. For those that don’t (or cannot) manage the adjustment process, restructuring will become unavoidable.

Download the full report for our comprehensive presentation.