Emerging economies need growth to repay debt

LONDON: The World Bank has warned that high borrowing costs have “changed dramatically” the need for developing nations to boost sluggish economic growth.

The multilateral lender’s latest warning comes as international bond sales from emerging market governments hit an all-time record of US$47bil in January, led by less risky emerging economies such as Saudi Arabia, Mexico and Romania.

However, some riskier issuers have started to tap markets at higher rates.

Kenya recently paid more than 10% on a new international bond – the threshold above which experts often consider borrowing unaffordable.

“When it comes to borrowing, the story has changed dramatically. You need to grow much faster,” Ayhan Kose, deputy chief economist of the World Bank, told Reuters in an interview in London on Tuesday, though he declined to comment on individual countries.

“If I had a mortgage with a 10% interest rate, I would be worried,” he added.

Kose added that faster growth, especially a real growth rate higher than the real cost of borrowing, could prove elusive.

Data published by the Institute of International Finance on Wednesday showed global debt levels had touched a new record of US$313 trillion in 2023 while the debt-to-gross domestic product ratio – a reading indicating a country’s ability to pay back debts – across emerging economies also scaled fresh peaks, indicating more potential strains ahead.

The World Bank warned in its Global Economic Prospects report, published in January, that the global economy was set for the weakest half-decade performance in 30 years during 2020-2024, even if recession is avoided.

Global growth is expected to slow for a third consecutive year to 2.4%, before ticking up to 2.7% in 2025.

Those rates are still well below the 3.1% average of the 2010s, the report showed.

The growth slowdown is particularly acute for emerging economies, around a third of which have seen no recovery since the Covid-19 pandemic and have per capita income below their 2019 levels.

Kose said this throws many education, health and climate spending goals into question.

“I think that it’s going to be difficult to meet those objectives, if not impossible, given the type of growth we have seen,” Kose said.

An escalation of the Middle East conflict is a further downside risk, adding to concerns over tight monetary policy and weak global trade.

“Trade has been a critical driver of poverty reduction, and obviously for emerging market economies, a critical source of earnings,” Kose said. — Reuters