Global South debt crisis worsens as interest rates rise and currencies fall

  • Currencies fall by average of 9% against the dollar in 2018
  • Future borrowing costs up 1.4 percentage points

Future borrowing costs for many global South governments have continued to rise, as measured by changes in yields of publicly traded bonds. On average across 15 selected countries (see Table below), bond yields have risen by 1.4 percentage points since the start of 2018, this is up from 1.1 percentage points in May. Yields effectively measure the cost of new borrowing for a government from private markets.

One of the drivers of this change is the rise in the yield on US government debt, which for debt due to be paid in 10 years has now increased by 0.7 percentage points since the start of 2018. However, yields for global South governments have on average increased by double that of the US.

Zambia has had the biggest increase, of 4.2 percentage points, as doubts continue to grow about the country’s ability to meet future debt payments, especially in 2022 when the first of its three Eurobonds come due to be paid. The yields on most African governments’ debt are now over 7%.

More dramatic recent changes have seen currencies continue to fall against the dollar. On average for the 15 countries below, currencies have fallen 9% against the dollar in 2018. Currency devaluations push up the relative size of debt owed in foreign currencies, so increase the relative size of debt payments.

Fourteen of the 15 countries below have seen their currencies fall against the dollar. The exception is Kenya where the value of the schilling has increased slightly against the dollar. Nigeria and Ethiopia have also effectively maintained their currency pegs with the dollar, while Cameroon, Senegal, Gabon and Cote d’Ivoire all use the CFA franc, which is effectively tied to the euro, and so any change mimics the change in value between the euro and the dollar.

Rising interest costs and falling currencies both threaten to keep increasing the size of debt payments, worsening the rising debt crisis across many countries in the global South.

Country Maturity of bond Yield in January 2018 Yield on 15 October 2018 Change in yield Change in exchange rate with the dollar since January 2018
Zambia 7 years 7.7% 11.9% +4.2% – 18%
Cameroon 8 years 5.7% 8.8% +3.1% – 3%
Angola 8 years 8.1% 8.6% +0.5% – 45%
Pakistan 10 years 6.8% 8.1% +1.3% – 16%
Ghana 8 years 7.1% 8.0% +0.9% – 6%
Sri Lanka 7 years 5.3% 7.6% +2.3% – 10%
Senegal 16 years 5.4% 7.6% +2.2% – 3%
Gabon 8 years 6.6% 7.6% +1.0% – 3%
Kenya 7 years 6.4% 7.0% +0.6% + 2%
Ethiopia 7 years 6.2% 6.8% +0.6% – 2%
Cote d’Ivoire 7 years 5.2% 6.9% +1.7% – 3%
Mongolia 5 years 5% 5.9% +0.9% – 5%
Nigeria 6 years 6% 6.4% +0.4% – 1%
Indonesia 8 years 3.5% 4.7% +1.2% – 11%
Philippines 14 years 3.5% 4.3% +0.8% – 8%
      Average +1.4% – 9%

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