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The late Pope Francis had trenchant opinions on many subjects, and the sustainability of sovereign debt burdens in emerging markets was among them.
Francis’s address on New Year’s Day this year asked “leaders of nations with Christian traditions to set an example by cancelling or significantly reducing the debts of the poorest countries”. The timing is appropriate: 2025 is one of the Catholic Church’s jubilee years, which come every 25 years and during which debts are traditionally forgiven. The previous one spurred the creation of the inspired global Jubilee 2000 campaign, which successfully argued for writing down the sovereign debt of nearly 40 poor countries. South Africa, which is chairing this year’s G20 of leading nations, has also put the issue on the agenda.
As it happens, though, the problems of indebted low- and middle-income countries have recently dissipated. Donald Trump’s tariffs and massive cuts in overseas aid may show contempt for the welfare of the developing world, but emerging (middle-income) and frontier (lower-income, riskier) markets have performed relatively well.
The consultancy Capital Economics calculates that the percentage of countries in debt distress, although it has ticked up a little, remains well short of the shocks inflicted by the Covid-19 pandemic and Russia’s invasion of Ukraine. The firm’s measure of EM currency risk has fallen. It is tempting fate to say this, but it looks as if the EM world is emerging from a five-year period of turmoil that hammered those dependent on exports and external capital.
In practice, and purely by accident, Trump’s tariff wars have created a surprisingly benign environment for emerging markets. Although no one could claim with a straight face that he is judiciously managing the exchange rate lower as part of some fantastical “Mar-a-Lago Accord”, the dollar has weakened, benefiting EMs that borrow in the US currency. The traditional perverse effect whereby risk aversion arising from eccentric US policymaking actually causes a flight to safety and strengthens the dollar has so far been absent. The net effect of a shambolic trade strategy and weakening growth has also been to reduce US Treasury yields, similarly supporting capital flows to higher-yield markets elsewhere. The spread of EM bond prices over US bonds, which typically rises at times of financial market stress and uncertainty, has remained well contained.
While the tariffs create intense uncertainty for EMs such as Bangladesh, Vietnam, Pakistan and Cambodia, which rely on exports to the US, Trump’s fire has been disproportionately concentrated on China. Other emerging and frontier market exporters have thus gained in relative access to the US market.
Individually, some economies remain at high risk of renewed financial turmoil. Capital notes that countries such as the hardy crisis perennial Argentina, together with Sri Lanka, Mozambique, Egypt and (for obvious reasons) Ukraine, are still vulnerable to debt or currency risk, far more so than safer countries such as Vietnam. But it also says that some of those countries — including Argentina and Egypt, and particularly Turkey — have made strenuous efforts to improve their public finances and reduce those dangers.
Predicting indefinite calm in middle- and low-income countries would be spectacularly unwise. Once Trump is done with yanking tariffs around, or as well as doing so, he might embark on tax cuts large enough to drive up interest rates and the dollar. China might also be a source of instability. There is always the risk Beijing will engineer a devolution of the renminbi to offset the loss of competitiveness from US tariffs and to head off deflation, which will obviously affect other emerging markets.
If there is a return to risk aversion and debt and currency problems in EMs, the world is not exactly perfectly placed to deal with them. The attempt to create a swift and predictable international debt-restructuring mechanism ran into disputes between China and other creditor nations, which stretched out the resolution of debt distress in Zambia and Sri Lanka over several years. The IMF and World Bank remain small relative to the size of global capital flows. And although Trump has historically been a big fan of creditors writing off debt to him and his companies, voluntarily or not, he’s unlikely to extend the same treatment on behalf of the US to debtor governments.
In that case, Pope Francis’s successor, Leo XIV, will no doubt be ready to take up the call for widespread debt relief. But it seems unlikely that with Trump as US president he will get the same response as Pope John Paul II did from President Bill Clinton during the last jubilee 25 years ago.
Emerging markets are doing better on their own than many investors expected. Given the state of international policymaking towards embattled debtor governments, that’s just as well.
alan.beattie@ft.com
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