Frontier market debt hit record $3.6tn last year as government borrowing rose sharply

About $120bn was added to the debt pile of low-income economies in 2022, with government borrowing reaching nearly $2tn, Institute of International Finance says

Sri Lanka is among frontier market countries that require sovereign debt restructuring, the Institute of International Finance says. Bloomberg

The value of frontier markets debt hit a record of $3.6 trillion last year, driven by a sharp rise in government and non-financial corporate sector borrowing.

Frontier markets added $120 billion to their debt pile last year, with government debt reaching a new high of nearly $2 trillion. Non-financial corporate sector borrowing rose close to $1 trillion, the Institute of International Finance (IIF) said in its latest Frontier Market Debt Monitor report.

However, despite the continued build-up in debt across sectors, “the pace of growth was relatively moderate last year — in fact, the slowest rate of increase since 2018”, IIF economists Emre Tiftik, Khadija Mahmood and Raymond Aycock said in the report.

Total frontier market debt-to-gross domestic production ratio also dropped for the second consecutive year, driven by strong growth momentum and an inflation-driven rise in borrowing costs.

Higher commodity prices also curbed the need for borrowings, especially for hydrocarbon-exporting nations.

The debt-to-GDP ratio dropped to 100 per cent in 2022, from 104 per cent the previous year.

“With around 26 countries (in our sample of 42 frontier markets) seeing some reduction in total debt ratios last year, the declines were particularly notable in Angola, Bahrain and Oman as higher commodity prices have reduced borrowing needs of many oil exporters,” the IIF said.

“In contrast, Sri Lanka, Lao and Ghana saw the largest increases in debt ratios.”

In terms of sectors, the decline in debt-to-GDP ratio was more evident for governments and households.

“At 56 per cent of GDP, frontier market government debt is now around 4 percentage points lower than its peak in 2020,” the IIF said.

In February, the Washington-based institute said the nominal value of global debt declined by $4 trillion to below $300 trillion last year, helped by stronger growth momentum and higher inflation.

Following a substantial surge in 2020-2021 during the pandemic, the global debt pile shrank to $299 trillion last year, marking the first decline since 2015, the IIF said at the time.

Central banks around the world have increased their benchmark policy rates to curb inflation. The US Federal Reserve has been increasing its benchmark rates aggressively since March last year. Another rise in policy rate is expected when it meets next month as it aims to bring down inflation from the 40-year highs of 2022 to its target range of 2 per cent.

The rise in interest rates makes borrowing in US dollars more expensive for governments, corporations and financial institutions, as well as household borrowers.

The strength of the US dollar has been an important driver of a rise in debt ratio for many vulnerable low-income countries. For some, delays in debt restructuring have exacerbated these debt vulnerabilities, the IIF economists said.

In addition to increasing debt vulnerabilities amid rising interest rates, frontier markets are also facing growing challenges from high inflation, weak economic growth, limited sources of external financing, persistent food insecurity and rising threats from climate change and natural disasters.

“In 2023, slow economic growth and tightening financial conditions will likely mean an even greater risk of debt distress, highlighting the debates about comprehensive structural reforms to reduce high sovereign debt burdens,” the IIF said.

In countries such as Ghana, Sri Lanka and Zambia, where sovereign debt restructuring has become unavoidable, co-ordination among official bilateral creditors — both Paris Club and non-Paris Club — to expedite an orderly debt restructuring remains the biggest challenge.

“Common Framework-eligible countries are scheduled to repay over $55 billion of public external debt in 2023,” the IIF economists said.

“Many frontier market sovereigns still have limited access to international debt markets, despite tentative signs of recovery in early 2023.”