External debt vulnerability in emerging markets and developing economies during the COVID-19 shock

Abstract

Purpose This paper aims to assess to what extent the COVID-19 shock is expected to create a debt crisis in emerging markets and developing economies (EMDEs) through two main questions: what are the main determinants of EMDEs external vulnerability? How vulnerable are EMDEs to the current COVID-19 shock compared to the global financial crisis (GFC)? Design/methodology/approach In addition to a descriptive analysis of the determinants of EMDEs external vulnerability, this paper designs two sub-indices of overindebtedness and financial fragility that capture EMDEs’ distinct characteristics. The two sub-indices together illustrate the overall external vulnerability to the current shock. Findings EMDEs are more vulnerable compared to the GFC era. Current debt threats arise mainly from debt architecture and the domination of volatile debt forms – primarily foreign currency-denominated bonds. Excessive fear of debt-deflation spirals after the GFC prompted EMDEs to expand their growth trajectories through a pattern of cheap private lending, loose measures and unmonitored fiscal expansion. Research limitations/implications Conclusive post-crisis data are still unavailable. Practical implications EMDEs need to balance between temporary accommodative measures and a post-shock policy mix that prevent a deflation spiral without worsening indebtedness and financial fragility. Moreover, financial prudence in face of growing credit demand is crucial, particularly in light of the monetary expansion and injected liquidity. Originality/value The indices offer a framework for examining external vulnerability in EMDEs based on theoretical and historical revisions, IMF benchmarks and EMDEs specific debt characteristics. The indices components can be offered for empirical examination in separate future research once conclusive data become available.

Public Debt Sustainability in Indonesia after Financial Crisis and During COVID-19 Pandemic

“…The non-optimal tax revenue impacts the budget deficit, increasing government debt. The COVID-19 shock to debt will put emerging market and development economies at higher risk of serious debt difficulties and a possible wave of recession in the longer term [25]. The estimated results of the study [26] show that the government's external debt will continue to grow to meet the growing need for health spending due to the COVID-19 pandemic.…”

The Widening of the North–South Divide: Debt Sustainability in a World Weakened by COVID-19

“…Countries must (either save or) borrow in order to fund recovery and development programs, which are jeopardized in the presence of large debt loads and default risks. This is especially important in a world following COVID-19 (Elkhishin and Mohieldin 2021) and facing the likelihood of other infectious disease outbreaks that are anticipated to become more prevalent and difficult to control (UNOCHA 2021). The more indebted a country is and the greater the burden of debt repayment, the less able it is to fund a health crisis response and accomplish development objectives.…”

Uma análise da dívida externa brasileira a partir dos anos 2000

“…Combinado com outros vencimentos do governo, a necessidade de financiamento do setor público consolidado foi de quase R$ 1,3 trilhão, o que representou 9,5% do PIB, um recorde histórico. Dessa forma, o país inicia a terceira década do milênio com um aprofundamento da dívida pública e, consequentemente, da vulnerabilidade externa estrutural (ELKHISHIN; MOHIELDIN, 2021;BRASIL, 2021;BCB, 2021).…”