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Tightening financial conditions, risks of a global recession and rising prices have drained the liquidity from economies, leaving countries like Sri Lanka, Pakistan, and Laos in a lurch. Rising Asia debt is causing concern among investors and several countries in the region are on the verge of defaulting on sovereign loans.
The International Monetary Fund (IMF) has forecast a slowdown in global growth to 3.2% in 2022 from 6.1% in 2021, with India and China taking a hit. The organization sees growth in Asia-Pacific to decelerate to 4.2%, cutting its previous forecast of 4.9% growth. Additionally, giving the example of Sri Lanka, the IMF said that Asia’s share in global debt had increased from 25% before the pandemic to 38% after the pandemic set in.
The situation has been likened to the Asian Financial Crisis of the late 1990s which took a toll on East Asia, but the high sovereign debt issue is affecting select economies in South Asia.
Where is Asia debt concentrated?
High sovereign debt in Asian economies has been a concern since the beginning of the pandemic and has reached worrying levels with the fallout of the Sri Lankan economy. The United Nations in a report said that 25 countries in the Asia Pacific were exposed to food, energy, and debt crisis. Low and middle-income countries are experiencing debt distress while prices are rising and there is a global slowdown in growth.
Sri Lanka was the first domino to fall in the region, with several more countries likely to fall into an economic crisis over repayment of loans. The island nation is seeing inflation of more than 60% and the incumbent president has declared an emergency. Leaders from the country are in talks with the IMF for a bailout but discussions were derailed after ex-president Gotabaya Rajapaksha fled the country. Experts and economists have attributed the failure of the Sri Lanka economy to the bad decision taken by successive governments compiled with the Covid-19 crisis which eroded Sri Lanka’s foreign reserves. The last straw was the Russian invasion of Ukraine which sent energy prices to a record high.
Laos is another country in South Asia which is likely to default on its repayments in the coming weeks. Inflation in the country stood at 23.6% in July, a 22-year high. Additionally, the local currency kip has collapsed against the US dollar, while high commodity prices have eroded foreign reserves. The $22 bn economy owes some $7 bn to China alone.
China has also doled out billions of dollars in loans to Pakistan, which is now facing a crisis like Sri Lanka and Laos. Pakistan had total external debt and liabilities of $128 bn at the end of March 2022, of which $64 bn is Chinese debt. The economy has been on the grey list of the Financial Action Task Force (FATF) which has kept foreign investors at bay. However, the country recently managed to reach an agreement with the IMF to revive a $6 bn bailout package. The South Asian country is experiencing a severe dollar crisis and has banned imports of certain items to curb dollar outflows. S&P Global last month cut Pakistan’s credit outlook to negative owing to high commodity prices, a depreciation of the rupee and poor global financial conditions. Inflation in the country rose to 24.9% in July.
Krishna Srinivasan, director of the Asia and Pacific Department at the IMF, in an interview with CNBC said, “If you look at debt for the region if you look at Asia’s share of total debt, aggregate debt, that’s gone up quite sharply.” Srinivasan added that Asia debt is a concern as advanced economies are raising interest rates at a dizzying pace.
China’s loans are also impacting the economy of Bangladesh, which is seeking help from the IMF, the Asian Development Bank and the World Bank. The country is expecting a dollar shortage with rising prices. Bangladesh had total foreign debts of $62 bn in 2021, as per the IMF, most of which is owed to the state lenders from Japan followed by China.
JPMorgan recently said that it expects the tourism-based economy of Maldives to default on its debt by the end of 2023. The country has seen its public debt swell above 100% of its GDP in recent years.
The Philippines, Myanmar, Mongolia and Papua New Guinea are some other Asian economies in the region that face high public debt obligations and risk defaults.
China debt trap
The majority of Asia debt and the resulting failure of economies is being blamed on China’s ‘Belt and Road Initiative’. The country’s loans to low- and middle-income economies have tripled to $170 bn over the last decade. US-based research organization AidData said that more than 40 low- and middle-income have exposure to Chinese debt of more than 10% of their annual GDP.
Foreign ministers and government executives of several countries have criticised China for its ‘debt-trap diplomacy’. The sentiment across the board is that China is lending money to developing nations and when they fail to pay it back the country takes control of key assets to meet repayment obligations. An example is Sri Lanka giving control of a major port to a Chinese company.
Additionally, it has been observed that China charges a higher interest rate on loans compared to loans from western countries. The repayment period is also shorter for loans issued by China.
China itself is seeing rising debt, and a government-backed think tank last month said that China’s debt to GDP ratio is expected to climb to 275% in 2022. China’s corporate debt has ballooned to $27 tn and makes up 37% of the total global corporate debt. The country is finding it difficult to improve its leverage ratio due to Covid-19 and stimulus to various sectors. Additionally, the property slump is feared to spill into the financial and some other allied sectors.
