A report by The Economist Intelligence Unit Sovereign debt crises are coming The world leader in global business intelligence The Economist Intelligence Unit (The EIU) is the research and analysis division of The Economist Group, the sister company to The Economist newspaper. Created in 1946, we have over 70 years experience in helping businesses, financial firms and governments to understand how the world is changing and how that creates opportunities to be seized and risks to be managed. Given that many of the issues facing the world have an international (if not global) dimension, The EIU is ideally positioned to be commentator, interpreter and forecaster on the phenomenon of globalisation as it gathers pace and impact. EIU subscription services The worlds leading organisations rely on our subscription services for data, analysis and forecasts to keep them informed about what is happening around the world. 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Through a distinctive blend of interactive conferences, specially designed events, C-suite discussions, member briefings, and high-calibre research, The Economist Corporate Network delivers a range of macro (global, regional, national, and territorial) as well as industry-focused analysis on prevailing conditions and forecast trends.SOVEREIGN DEBT CRISES ARE COMING © The Economist Intelligence Unit Limited 2020 1 T he coronavirus pandemic is a game-changer for the global economy. The years 2020 and 2021 will be lost years for growth. The Economist Intelligence Unit does not expect global GDP to recover to pre-coronavirus levels until 2022. Tackling the pandemic will require extraordinary fiscal efforts, in the light of lower fiscal revenue and much higher healthcare and social expenses. Governments in most developed countries have also concluded that an increase in public expenses, and, therefore, public debt levels, is preferable to the widespread destruction of productive capacity during the epidemic. As a result, public debt levels will increase sharply this year. Public debt is piling up For the most reliable sovereigns, the cost of servicing higher levels of public debt will not be an immediate cause for concern. However, governments will eventually have to confront the debt pile-ups. To curb fiscal deficits, governments in most developed countries will not be able to pursue spending cuts. Austerity absorbs political capital, and there might not be enough left to pursue such a plan, especially given that the last period of belt-tightening was so recent for many countries. Governments are also unlikely to be able to make the sorts of savings that could meaningfully reduce debt stocks. In many economies, the public sector is much smaller than before the 2008-09 financial crisis. Cuts to healthcare spending, for instance, are unlikely, as the epidemic has brought to light the stress that health systems are under because of recent austerity measures. Governments have little fiscal room for manoeuvre Rather than dramatically cutting spending, governments are likely to look at the other side of their balance sheets and consider raising fiscal revenue. Among advanced economies, the trend over the past 40 years has been one of lower corporate and personal income taxes. Demographic changes were already going to force governments to reverse this eventually; the coronavirus crisis might mean that they will have to do it sooner. However, it is not clear whether governments will be able to raise taxes quickly enough for such measures to be sufficient. Investors appetite for increased amounts of sovereign debt may also wane. Sovereign debt crises could flare up again in the euro zone Most developed countries, especially those that have been able to borrow in their own currency and have deep domestic capital markets, will not face sovereign-debt issues. However, not all countries enjoy such favourable conditions. As a result, some developed countries might, in the medium-term, find themselves on the brink of a debt crisis. This is compounded by the fact that many of the European countries that are among the worst affected by the epidemic, such as Italy and Spain, already had weak fiscal positions before the coronavirus outbreak. South European states are still recovering from years of austerity, combined with high levels of public debt, ageing populations (which are more vulnerable to severe forms of the coronavirus) and persistent fiscal deficits. The European Central Bank would act swiftly to contain the fallout, but a debt crisis in any of these countries would create massive turbulence on financial markets. In turn, the crisis would quickly spread across the globe. Sovereign debt crises are comingSOVEREIGN DEBT CRISES ARE COMING © The Economist Intelligence Unit Limited 2020 2 Multilateral assistance will give poor countries some breathing space Poorer countries would be among the hardest hit in such a scenario; their indebtedness has risen sharply over the past ten years. In an effort to mitigate the economic impact of the pandemic, multilateral financial institutions, together with the worlds wealthiest countries, have offered substantial financial support to help to ease the financial burden on low-income and emerging-market economies. The IMF , the World Bank and other multilateral development banks have ramped up their emergency funding support, debt relief is on the agenda and the G20 is offering substantial financial support by suspending debt repayments. These efforts will give the worlds poorer countries some short-term breathing space, as well as freeing up resources for them to beef up healthcare spending and implement economic stimulus and relief programmes. Poorer countries will emerge from the coronavirus crisis even more indebted However, most new funding (albeit on concessional terms) will be added to the balance sheets of emerging economies. In addition, the debt-assistance package from the G20 is a delay rather than a write-off; debt repayments will remain outstanding and continue to accrue interest as time passes. Many countries will therefore emerge from the current virus-driven economic crisis even more indebted and financially stressed than before. This will raise concerns about their ability to repay external debt in the absence of more comprehensive debt-relief plans. Sovereign defaults might not take place this year, but they are likely among poor countries in the medium-term. Source: The Economist Intelligence Unit. External debt service ratio - pre-relief (% of exports, income and transfers in 2020) More than 40 30 - 40 10 - 20 Less than 10 20 - 30 No dataSOVEREIGN DEBT CRISES ARE COMING © The Economist Intelligence Unit Limited 2020 3 Source: The Economist Intelligence Unit. Total external debt stock (76 IDA states; US$ bn) 0 100 200 300 400 500 600 700 800 0 100 200 300 400 500 600 700 800 19 18 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01 2000 +US$400bn since 2010 with a CAGR of 9% Latin America 2017) 25 - 100 10 - 25 1 - 5 0 - 1 5 - 10 No data * Direct loans only. Source: Chinas Overseas Lending, S Horn, C Reinhart US$ bn) 0.0 5.0 10.0 15.0 20.0 25.0 30.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 21 20 19 18 2017 Latin America & Caribbean Europe & Central Asia South Asia East Asia Middle East & North Africa Sub-Saharan Africa© The Economist Intelligence Unit Limited 2020 5 Prepare for risk with The Economist Intelligence Unit The Economist Intelligence Unit has a number of risk products and services available: Risk Briefing Identify, assess, compare and mitigate the risks of doing business in 180 markets Risk Briefing provides you with expert analysis to identify and mitigate operational risk in 180 markets, enabling you to make business decisions with confidence. Risk Briefing provides forecasts, alerts, background studies, and data covering a wide range of risk factors. At the centre of the service sits a risk model that assesses a countrys overall business operating risk. It combines our renowned political and economic analysis with new material covering the business conditions on the ground. The resulting scores allow us to rank countries by operating risk. Our Risk Briefing service includes: l Coverage across 180 countries l Comprehensive quarterly updates l Scenarios for risk sub-categories providing analysis of the current situation in a particular country l Regular events-driven coverage affecting our assessment of operating risk l One model across all countries enabling quick and easy comparison© The Economist Intelligence Unit Limited 2020 6 Prepare for risk with The Economist Intelligence Unit Country Risk Service Sovereign risk ratings and analysis for 131 countries Country Risk Service provides detailed credit risk assessments in 131 developed and emerging markets, combining The EIUs market-leading data capability and country expertise in a rigorous risk modelling framework. 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Country Risk Model includes: l A wide range of monthly and quarterly macroeconomic data l Ratings and data which can be easily compared across countries over time l Regular updates to ensure deteriorating trends are caught earlyCover image - © Who is Danny/Shutterstock Copyright © 2020 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.