Accelerated tapering and the potential for three rate increases from the Fed has sent debt markets scrambling to assess an altered environment. Years of easy monetary policy changed the game for emerging market borrowers who are now increasingly warry about the possibility of a taper tantrum and renewed concerns about debt sustainability.
Observers point to the possibility that rising rates trigger outflows of "hot money," destabilizing already rocky public finances across many emerging and frontier markets in the process. A research note by the IMF sounded the alarm about the impact of Federal Reserve policy while cautioning that the likelihood of a taper tantrum will be defined by the speed of increases and efficacy of forward guidance for countries with strong growth and sustainable debt loads.
In spite of traditional caution about EM debt servicing, though, 2022 has seen a stark divergence between hawkish central banks' free-spending finance ministries across markets.
EMs, like Greece, have signaled new borrowing totaling over $13bn while Ethiopia creates a new debt instrument, which has the potential to expedite additional off-balance-sheet borrowing while expediting reprofiling efforts. Meanwhile, social spending often remains elevated, with Brazil's 2022 budget continuing record social spending while Vietnam just announced an additional $15bn package.
While such spending highlights valid concerns around electoral pressures, fragile recoveries, and continued social scaring from waves of lockdowns, the collapse in Ghania bonds highlights how risky additional borrowing is. Just this week, the bonds of the region's second-biggest economy lost 10% in 10 days, plunging Ghanian debt into distressed territory.
Investors cite that debt has climbed from 31% to 82% of GDP in a decade amid decreased re-financing opportunities. This case of increased illiquidity comes in spite of strong economic growth and demands caution from sovereign borrowers who might look to lock in lower rates or increase public spending as the low rate world quickly comes to an end.
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