The coronavirus pandemic has led to a global recession. In many countries, there are budget deficits due to the huge spending on health care to combat the spread of the virus. According to analysts, it is necessary to cut health care expenses, otherwise some of the world's largest emerging economies will face a financial crisis in the coming years. In this case, it is better to discuss debt restructuring with investors in order to avoid protests.
Government spending to suppress the pandemic in countries such as India, Malaysia, Poland, Qatar, South Africa, Thailand, etc., exceeded 10% of GDP. The World Bank said that countries dependent on tourism as well as major commodity-producing countries are at risk. While many countries that previously had surpluses faced deficits. Moreover, the public debt of developing countries has reached a record of 51% of GDP.
Gabriel Stern, chief economist at research firm Oxford Economics, said it is necessary to fund budget spending if it rises.
According to the latest data, the loss of production in the global economy will amount to $12.5 trillion in 2020 and 2021. As a result, 37% of bonds in JPMorgan's benchmark Emerging Markets Sovereign External Debt Index could be on the verge of default next year.
Oxford Economics reported that budget deficits in Brazil and South Africa will exceed 15% of GDP this year. William Jackson, emerging markets economist at Capital Economics, argues that it will be necessary to cut the budget by 6-7% of GDP per year over several years to keep the debt level below 100% of Brazil's GDP. South Africa and Mexico faced the same problems.
Emerging bond markets lost $33.5 billion in March due to the global spread of the virus. Central banks in developed countries are pumping trillions of US dollars into financial markets as an incentive for developing countries. So, the authorities of developing countries have allocated almost $90 billion in international bond markets.
The financial situation of developing countries was only temporarily eased. In the future, they will face an increase in the cost of paying interest on debt and paying compensation.
Phoenix Cullen, emerging market strategist at Societe Generale said that he had never faced such a thing before. The solution to the problem of refinancing the sharply increasing debt has been postponed. According to him, it is difficult to deal with the worsening financial situation.
The IMF and the World Bank will help poor countries to cope with the crisis.
However, analysts warn that the magnitude of the economic shock in middle-income countries is enormous. Therefore, it is necessary to focus not only on the debts of poor countries. The magnitude of the problem will require trillions of dollars. The worst is yet to come for developing countries.
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