Developing Countries Face Financial Death Trap in Global Bond Markets

Financial systems across the world should provide sufficient funds for high-growth "catch-up" phases of sustainable developments, enabling poorer countries to grow rapidly by investing in a balanced way within them. However, the flow of funds from global bond markets and banks to developing countries remains small, costly to the borrowers, with developing-country borrowers paying interest charges that are often 5-10 per cent higher per year than the borrowing costs paid by rich countries. This has resulted in developing countries facing a financial death trap, with access to refinancing becoming increasingly difficult, leading to default and a loss of global financial reputation.

Key Takeaways:

• Developing countries have lower levels of human capital, infrastructure, and businesses compared to richer countries, limiting their growth prospects.
• The global bond market and banking system provide insufficient funds for the high-growth "catch-up" phase of sustainable development in developing countries.
• Developing-country borrowers pay high interest rates, often 5-10 per cent higher per year than rich-country borrowers, due to lower credit ratings.
• International lenders and rating agencies assign lower ratings to developing countries based on mechanical formulas, often creating a self-fulfilling prophecy of high risk.
• Rich-country governments, which borrow in their own currencies, do not face the same risk of a sudden stop, as their central banks act as lenders of last resort.
• Low- and lower-middle-income countries borrow in foreign currencies, paying high interest rates and suffering from sudden stops, unlike Greece and Portugal, which have access to low-cost borrowing due to investment-grade ratings.
• Major credit-rating agencies assign investment-grade ratings to most rich countries and upper-middle-income countries, but sub-investment-grade ratings to nearly all lower-middle-income countries and low-income countries.
• Trillions of dollars in investment funds are channeled away from sub-investment-grade securities, making it hard for developing countries to recover after being downgraded.
• An overhaul of the global financial system is long overdue, with the G20 and IMF devising a new credit-rating system that accounts for growth prospects and long-term debt sustainability.
• Implementing a new framework with pragmatic strategies, G20 and IMF financial firepower supporting a liquid secondary market in developing-country sovereign bonds, and increasing grants and concessional loans from the World Bank and other development finance institutions are necessary.

Statistics:

• Ghana's debt-to-GDP ratio is 83.5%, lower than Greece's 206.7% and Portugal's 130.8%.
• Ghana pays around 9% on 10-year borrowing, while Greece and Portugal pay 1.3% and 0.4%, respectively.
• Moody's assigns investment-grade ratings to just two lower-middle-income countries (Indonesia and the Philippines).
• Trillions of dollars in pension, insurance, bank, and other investment funds are channeled away from sub-investment-grade securities.
• 20 governments, including Barbados, Brazil, Greece, Tunisia, and Turkey, were downgraded to below-investment grade in the 2010s.
• Only four of the five governments that recovered their investment-grade rating are in the EU (Hungary, Ireland, Portugal, and Slovenia).

Sources:

• Global analysts and financial experts
• COP26 climate summit
• The writer (senior journalist, writing on promoting knowledge-based society, socio-economic transformation, climate change, rule of law, human rights & good-governance)
• The New Nation