Developing world faces $2.5trn shock; Ghana behaves like rich sultanate in the gulf – Bloomberg

Although the bond market has recently experienced a modest uptick, distressed debt in emerging nations continues to be a severe weakness in the world economy that is gearing up for a downturn.

$215 billion in debt due in the next two years must be refinanced by governments of emerging nations.

But many are no longer able to borrow. Asset managers including Allianz SE, BlackRock Inc., and Fidelity Investments are among those with the greatest exposure to distressed debt.

Guillermo Osses, head of emerging-market debt strategies at hedge fund manager Man GLG, which has managed the best performing EM fund this year, stated that “we expect the borrowing circumstances for emerging markets to stay difficult and rates to remain high.”

Around 15 countries currently have no choice but to refinance their current debt levels at these rates because the prices of their sovereign bonds are trading at distressed levels. They will need to restructure the debt, go to the IMF, or depreciate their currencies.

Ghana benefited from a debt-relief project launched by the IMF and World Bank in the early 2000s, which erased nearly $4 billion of its debt stock by 2006. This initiative also helped dozens of other poor nations. According to Bright Simons, an economist at the Accra-based think tank Imani Centre for Policy and Education, the transition from predominately concessional funding to predominately commercial borrowing after 2007 was momentous for Ghana.

The money was being sent directly to the budget, like a steroid injection straight into the bloodstream, according to Simons. “This new source of funding was radically different from what we’d experienced in the past.”

The cathedral serves as “the ideal illustration of the spending spree: Ghana behaving like a fantastically affluent sultanate in the Gulf rather than a poor country just reaching frontier market status.” Ghana spent years promoting itself as a business-friendly nation that promised political stability and a venue for foreign investors to achieve outsized returns that they would easily be able to repatriate in order to remove the “shame of debt.”

In 2019, foreign direct investment surged to around $4 billion, consistently outpacing Nigeria’s neighbor, whose economy is more than five times larger.

However, as Simons points out, Ghana is “particularly sensitive to global fluctuations in sentiment” due to its FDI-stock-to-GDP ratio of around 80%, which is far higher than the continental norm of about 25%.

President Nana Akufo-Addo has experienced domestic issues as a result of these adjustments. Around the nation, protests and store closings have been sparked by the rising cost of living.

In addition, the majority of the government’s own party has demanded the resignation of finance minister Ken Ofori-Atta, who is under fire from lawmakers for his handling of the economy and expenditure on the cathedral.

The beginning of commercial oil production in 2010 helped shape Ghana’s economic ascent, but stresses in the system have become more apparent. Crude production figures have never matched government projections — it sits at under 200,000 barrels per day, less than half of earlier predictions — and investment in the sector has slowed in recent years.

The administration and opposition generally hold each other responsible for the country’s current financial crisis, along with the effects of the epidemic and the war in Ukraine on the economy. The former administration issued a number of lucrative take-or-pay electricity contracts between 2013 and 2015, according to certain current ministers.

The agreements, which were made to address a short-term electricity crisis, led to the construction of private production facilities with a capacity of 4,600 megawatts, nearly twice the level of the country’s peak demand of 2,700 megawatts. As a result, the nation now pays $500 million annually for electricity that is not used and cannot be stored.

By 2023, debt to fuel providers and power firms may total $12.5 billion.

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