Russia's war on Ukraine could spark the worst debt crisis for developing nations in a generation, World Bank says
- Russia's war has made economic situations for some developing nations worse, the World Bank said.
- At risk are emerging economies that depend on commodity imports or tourism, an economist said.
Russia's war on Ukraine has exacerbated economic risks for some developing nations and may trigger a debt crisis, a World Bank economist said.
The pandemic already had shaken their economies and raised their total indebtedness to a 50-year high, according to a blog post Monday, but the geopolitical turmoil has intensified this.
"The Ukraine war immediately darkened the outlook for many developing countries that are major commodity importers or highly dependent on tourism or remittances," Marcello Estevao, the World Bank's global director for macroeconomics, trade, and investment, wrote.
Plus, rising interest rates — spurred by the US Federal Reserve's hawkishness — have added stress to emerging economies. The poorest countries have continued to take on an increasing amount of variable-rate debt as a share of their total debt. This increases their vulnerability to rate hikes.
Now, up to a dozen developing countries could default on their debt in the next 12 months, Estevao estimated. While that would be fewer than what was seen during debt crises in the 1980s and '90s, it would still represent the "largest spate of debt crises in developing economies in a generation," he said.
Estevao called for an update to support systems for these developing nations, saying the current ones did not include the necessary preemptive measures.
For example, at the start of the pandemic, the G20 set up the Debt Service Suspension Initiative, which provided about $13 billion in suspension of debt payments for nearly 50 countries. But, the World Bank said, that was a temporary safety net that expired last year.
"The main global mechanisms available today to tackle debt crises weren't designed for these conditions," Estevao wrote.