South Asia’s debt-stressed frontier markets face more pain
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Emerging Markets

South Asia’s debt-stressed frontier markets face more pain


Pakistan, Sri Lanka and the Maldives failed to boost their financial buffers in good times and are now suffering from an oil price shock

South Asia is caught in a vicious circle, as governments failed to store up enough financial liquidity when markets were benign and interest rates low, leading bankers and analysts have told GlobalMarkets.

Pakistan, Sri Lanka and the Maldives are all suffering from a similar cocktail of problems.

Reza Baqir, a former governor of Pakistan’s central bank, now global practice leader of Alvarez & Marsal’s sovereign advisory services in Dubai described the outlook for the region as “one of the worst times that I have ever seen”.

“Troubled South Asian states have low levels of foreign reserves relative to the needs of the country [and] high current account deficits,” he said. They also have high debt-to-GDP ratios, he said, making them vulnerable to high interest rates and oil prices.

On Thursday Sri Lanka, rated ‘selective default’ by S&P, said it had reached an agreement with the Export-Import Bank of China covering $4.2bn of debt. Earlier this week Fitch Ratings affirmed the Maldives’ long term rating at B- with a negative outlook. In July Pakistan, rated CCC, secured its latest $3bn bailout from the International Monetary Fund.

“I spend a lot of time looking at the region,” said Avanti Save, Asia head of credit strategy at Barclays Capital in Singapore. “I’d say the smaller countries in South Asia are facing their most serious debt challenge for at least 20 years.”

Living without buffers

Taimur Baig, chief economist at Singapore’s DBS Bank, said South Asian countries were “living beyond their means” before they were hit by an oil price shock. “They did not boost buffers, so when the tide turned — and when shocks come fast and hard, everyone needs more reserves — the capital markets shut down.”

George Xu, a primary rating analyst at Fitch, said the Maldives was one of the “more vulnerable countries” at its current rating level. “Risks remain skewed to the downside,” he said. “Its foreign reserve buffers are perilously low, with just 1.1 months’ worth of coverage of current external payments.”

Baqir said he wanted Pakistan to “stand on its own two feet, and to do so without repeatedly having to go to the IMF for help”.

“This requires better governance and better institutional frameworks for decision-making that take more of a whole country approach,” he said.

But experts do not expect gloom to become doom. Baig said bankers and policymakers at the World Bank/IMF annual meetings in Marrakech were committed to helping South Asia’s fragile frontier states back on their feet.

“The region has friends,” he said. “I don’t think a disorderly debt default outcome is on the cards. The vibe I’m getting here is that a lot of work is being done to aid debt restructuring. These countries are not alone. They have the attention of multilateral development banks — but solving these issues will require a lot of domestic pain.”