The escalating financial crises in Sri Lanka and Pakistan, both of which have reached out to the International Monetary Fund for a lifeline, shed light on the long and painful debt restructuring expected from frontier markets that are tackling both the aftermath of the Covid-19 pandemic and navigating unchartered waters around rising rates and inflation.
Sri Lanka defaulted on most of its international bonds and debt in May, after having suspended foreign debt payments in mid-April. This followed a large-scale economic mismanagement that saw its former president flee amid protests across the country in July.
Pakistan, which has also faced political upheavals this year, got an 11th-hour lifeline from the IMF in August when the multilateral said it would provide $1.1bn to the beleaguered nation to avoid a default. IMF officials are planning to travel to Pakistan in November to prepare another review following devastating floods that hit the country in mid-June, accelerating its funding needs.
These are just two examples of the travails of frontier market economies that are combating rising global rates, weaker currencies and domestic issues exacerbated by the pandemic.
Both Sri Lanka’s and Pakistan’s ratings have been downgraded this year — but their future, and that of other frontier countries on the edge, is dependent on support from multilateral development banks and other international financial institutions.
“One of the key factors will be to what extent IFIs like [the] IMF are willing to step in and provide additional liquidity to these economies, which are essentially locked out of the capital markets at this stage,” Nishad Majmudar, an analyst in Moody’s sovereign risk group, told GlobalMarkets. That, he added, was the biggest risk for frontier countries.
David Loevinger, a sovereign analyst at US asset manager TCW, said what had happened to Sri Lanka was “tragic” and had been driven by a government unwinding older — but stronger — reforms. But its next hurdle would be even bigger.
“The challenge is… a lot of their debt is to non-Paris Club bilateral creditors, China and India, multilaterals that don’t provide haircuts and [investors] like us,” said Loevinger during a panel organised by the Institute of International Finance. “So, it’s going to be a long and painful drawn-out [debt restructuring] process.”
Sri Lankan central bank governor Nandalal Weerasinghe, as well as state minister of finance Shehan Semasinghe, were in Washington DC this week to negotiate with the IMF for concessions.
The pressure on frontier markets is only going to go up. The surge in the dollar and rampant inflation have made frontier central banks in 19 of the 35 markets rated by Fitch raise interest rates in response, the agency said this week.
Only Angola — which has benefitted from a high oil price, a strong local currency and falling inflation — and Uzbekistan cut policy rates.