Expect more sovereign defaults over the next 10 years as debt burdened countries struggle to refinance, S&P Global Ratings says

Heading toward EM sovereign defaults? Sovereign defaults among emerging market countries may become more common over the next decade as heavy debt burdens make it difficult for these countries to keep up with high borrowing costs, the Financial Times reports, citing a report by S&P Global Ratings. Despite a global monetary easing cycle now underway, nations at risk of default are struggling to marshall the resources needed to service foreign currency debts, with new creditors also hard to come by. The story got ink from Reuters and Bloomberg.

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Pulse check: Despite there being no telltale sign for a sovereign default, S&P found that in the 12 months prior to defaulting, governments spent about a fifth of their revenue paying off interest payments on accumulated debts. Countries facing potential defaults include the Maldives — which was recently bailed out by India — and Argentina.

Defaults by a different name? Argentina’s President Javier Milei okayed a decree last month that allows swaps of maturing debt for new debt at market interest rates without prior approvals from legislators. These “buyback” transactions are expected to become more common, leading to less cut and dry notions of what it means for a country to default, senior sovereign ratings analyst at S&P Giulia Filocca explained. Despite appearing distinct from traditional defaults, such transactions can be categorized as distressed exchanges if done to avoid an outright default, Filocca adds.

Who’s safe for now? Zambia and Sri Lanka have managed to rebound from defaults, the FT said. Meanwhile, Kenya and Pakistan narrowly avoided defaults this year thanks to new loans — with Saudi and the UAE among those extending financial support to Pakistan — and IMF bailouts. Despite this, they are unable to tap bond markets for refinancing due to high borrowing costs charged to governments in similar situations. Ghana recently exited default after restructuring debts, and Ukraine successfully refinanced over USD 20 bn in debt payments following a moratorium on payments due to Russia’s invasion.

BUT- Nations that have restructured their debts carry that legacy in terms of lower ratings. “That points to the possibility of repeat defaults,” Emea sovereign specialist at S&P Global Ratings Frank Gill said. Fiscal alternatives and current account gains on the back of FDI may help to stave off defaults, but FDI performance has shown little signs of an uptick, Gill added.

MARKETS THIS MORNING-

Asian markets are mixed at dispatch time this morning, with benchmarks we follow in Shanghai and Hong Kong slipping. Meanwhile, the ASX 200 and the Nikkei were both in the green.

Dow, Nasdaq, and S&P futures were all up slightly in overnight trading after the Dow and the S&P hit new record high closes yesterday. Futures also suggest major European benchmarks are set to start the trading day in the green a little later this morning.

THE CLOSING BELL-

The ADX rose 0.5% yesterday on turnover of AED 1.22 bn. The index is down 2.9% YTD.

In the green: Umm Al Qaiwain General Investments Co. (+11.4%), Gulf Medical Projects Company (+8.1%) and Gulf Pharmaceutical Industries Manufacturers (+5.7%).

In the red: Commercial Bank International (-10.0%), Al Khaleej Investment (-5.5%) and Chimera (-3.4%).

Over on the DFM, the index rose 0.3% on turnover of AED 230.1 mn. Meanwhile Nasdaq Dubai closed up 0.5%.