The dollar rampant at its highest level in two decades is crushing the purchasing power of most currencies in international markets, Fears of an economic downturn The burning foreign exchange reserves point to a record number of developing countries now in dire straits.
According to Reuters, a record number of developing countries are currently facing difficulties as many countries have been hit hard Similar economic hardship to Sri Lanka, including typical debt crises, currency crash indicators, 1,000 basis point bond spreads, and foreign exchange reserves. See the list below.
High borrowing rates, inflation and debt raise fears of economic collapse, as analysis showed that Sri Lanka, Lebanon, Russia, Suriname and Zambia are already in default, Belarus is on the verge of default, and at least dozens of other countries are in danger of default.
The total price is amazing. Analysts estimate that $400 billion of debt is at risk, using 1,000 basis points of bonds as the threshold for pain. Argentina is the largest, with over $150 billion, followed by Ecuador and Egypt, each with between $40 and $45 billion.
The Russian ruble and the Brazilian real are the only currencies to gain against the dollar this year, which many market experts say is due to capital controls.
Investors are wondering how long the dollar’s rally can last, but many are waiting for the dollar to turn bearish before doing so. Compared to a basket of its peers, the dollar is up about 13 percent this year, reaching its highest level in two decades.
It’s also on track for its best year since 1997, thanks to a hawkish Federal Reserve and investors seeking safety from the uncertain global economy. (Reuters graphic: Currency markets in 2022)
See below the list of countries at risk, based on a Reuters report:
Argentina(Reuters drawing: Pain spread)
It seems certain that the global leader in the event of a default will increase their sum. In the illicit market, the peso is currently trading at a discount of nearly 50 percent, reserves are at an all-time low, and the bonds are now worth 20 cents on the dollar, less than half the value of a post-2020 debt restructuring.
Although the government won’t have much debt to pay off until 2024, it will begin to pile up, and there are growing concerns that powerful Vice President Cristina Fernandez de Kirchner may try to force Argentina to abandon its commitment to the IMF.
Belarus (Reuters Bianek: Belarus bonds)
After siding with Moscow in the Ukraine campaign, Belarus is now subject to the same harsh sanctions that forced Russia into default last month.
The Latin American country only defaulted on its debt two years ago, but violent protests and an attempt to oust President Guillermo Lasso have thrown it into turmoil.
It has significant debt, and JPMorgan has raised its forecast for the public sector fiscal deficit to 2.4 percent of GDP this year and 2.1 percent of GDP next year as the government subsidizes food and fuel. The spread on the bonds exceeded 1500 basis points.
Egypt (Reuters Bianek: The decline in foreign exchange reserves in Egypt)
With a debt-to-GDP ratio of about 95%, Egypt has seen one of the largest outflows of foreign money this year, according to JPMorgan estimates, totaling about $11 billion.
Egypt is expected to have to repay $100 billion of hard currency debt over the next five years, including a massive $3.3 billion bond, in 2024, according to money management firm FIM Partners.
Cairo devalued the pound by 15 percent and requested assistance from the International Monetary Fund in March. However, bond spreads have since risen to more than 1,200 basis points, and default swaps (CDS), a tool used by investors to manage risk, is now a factor in the 55 percent chance that Cairo will default.
However, according to Francesc Balcells, head of information for emerging market debt at FIM Partners, about half of the $100 billion that Egypt must pay by 2027 will go to the IMF or bilateral agreements, most of which is in the Gulf. He added that Egypt “should be able to pay under normal circumstances.”
Confidence levels plummeted after Bitcoin made bid legal and closed the door to International Monetary Fund hopes. Investor confidence has fallen to the point that $800 million in six-month bonds are trading at a 30 percent discount and long-term bonds at a 70 percent discount.
Ethiopia (Reuters Bianek: Africa’s debt problems)
Ethiopia is a financial powerhouse in East Africa and has experienced significant economic expansion in recent years. Addis Ababa, the nation’s capital, has been ranked as the eighth richest city in Africa and one of the continent’s richest cities.
But Addis Ababa will be one of the first countries to get debt relief under the G20 Common Framework Program. Although the country’s protracted civil war has slowed progress, it is nonetheless paying interest on its single billion dollar international bond.
Ghana (Reuters Bianek: How not to spend it)
Overheated borrowing has pushed Ghana’s debt-to-GDP ratio to nearly 85 per cent. It has already spent more than half of its tax income on debt interest payments, and its currency, the cedi, has lost about a quarter of its value this year. In addition, inflation rose by a third.
Kenya (Reuters Bianek: Kenya’s concerns)
About 30 percent of Kenya’s profits are used to pay interest on the borrowing. Since it now lacks access to funding markets and has more than half a billion dollars in bonds maturing in 2024, this situation is problematic.
“These countries are most at risk only because of the amount of debt outstanding relative to reserves, and financial issues in terms of debt stabilization,” said David Rogovich of Moody’s for Kenya, Egypt, Tunisia and Ghana.
The gap in Nigerian bonds is currently just over 1,000 basis points. However, the country’s reserves, which have been steadily increasing since June, should comfortably meet the next country’s $500 million in bonds a year. However, the government spends nearly 30 percent of its income on debt servicing.
“I think the market is overpricing a lot of this risk,” said Brett Dement, head of emerging market debt at investment firm Abrdn.
Pakistan (Reuters Bianek: Countries in debt crisis have reached record levels)
Last week, Pakistan reached an important agreement with the International Monetary Fund. This discovery could not have come at a better moment, as rising costs of energy imports put the nation at risk of facing a balance of payments crisis.
The country’s foreign exchange reserves have dwindled to just $9.8 billion, enough for five weeks of imports. The Pakistani rupee fell to record lows, and there is more pain waiting for the dollar to rise. As the incoming administration spends 40 percent of its revenue on interest payments, spending cuts are now urgently needed.
Tunisia (Reuters Bianek: The suffering of African bonds)
Africa has many countries that have applied to the IMF, but Tunisia appears to be among the most vulnerable.
Because of President Kais Saied’s efforts to consolidate his grip on power and the country’s strong and stubborn labor union, the country is running a budget deficit of nearly 10 percent, one of the highest public sector wage bills in the world. There are concerns that it may be difficult to secure or adhere to the IMF program.
Sophisticated investor demand to buy Tunisian bonds against US bonds has risen to nearly 2,800 basis points, putting the country alongside El Salvador and Ukraine as the top three defaulters at Morgan Stanley. The head of the Central Bank of Tunisia, Marouane Abbasi, stated that an agreement with the International Monetary Fund is now necessary.
Ukraine (Reuters Bianek: Ukraine’s bonds prepare to default)
The Ukrainian hryvnia is down more than 5 percent against the dollar. Because of the Russian invasion, big investors like Morgan Stanley and Amundi have warned that Ukraine will almost certainly need to restructure its debt of $20 billion or more.
The deadline is September when bonds totaling $1.2 billion are due to be repaid. Kyiv may be able to make the payments thanks to reserves and aid money. However, investors believe the government will follow suit in light of state-run Naftogaz’s request for a two-year debt freeze this week.
With the price of the dollar rising, few would dare stand in his way
On the downside, what has surprised many is how strong the dollar is. However, the dollar’s momentum has made investors reluctant to stand in his way.
“Almost any currency looks attractive compared to the dollar on a long-term basis, but investors have to ask themselves.. what happens if you place a position and the dollar continues to rise?” Brian Rose, chief economist at UBS Global Wealth Management, told Reuters.
While Recession fears increased With the Fed on a path of aggressive tightening, the economic outlook for many others looks more bleak, boosting the dollar’s strength even more.
Analysts at TD Securities noted that “the US dollar is still the king of FX and it would be incredibly brave and naive to assume otherwise.”
What this rise in the dollar has done is drive the foreign exchange reserves of other countries down sharply, due to billions of dollars being sold in market interventions that have dramatically devalued their currencies.
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