S&P Global Ratings has forecasted an increase in sovereign defaults on foreign-currency debt over the next decade. This expectation stems from significantly elevated debt levels and rising borrowing costs associated with hard currency obligations.
Increased Debt Servicing Burdens
The ratings agency highlighted that, on average, sovereigns under review spent nearly 20% of their general government revenues on interest payments in the year preceding a foreign-currency debt default. Factors such as rising inflation, currency devaluation, adverse terms-of-trade shocks, and a substantial share of government debt denominated in foreign currencies have driven these higher borrowing costs.
No Single Predictor for Sovereign Defaults
According to S&P Global credit analyst Giulia Filocca, sovereign defaults on foreign currency obligations from 2000 to 2023 were largely influenced by weak institutional frameworks, fiscal challenges, and unfavorable debt compositions. “A single measure that consistently and reliably predicts sovereign defaults does not exist,” Filocca explained in the report, indicating the complexity and variety of factors contributing to debt distress.
External Imbalances as a Key Risk Indicator
The report further noted that countries with rising net external liability positions—where the combined debts of the public and private sectors owed to non-residents exceed the assets invested abroad—are more susceptible to default. In contrast, countries that are net external creditors generally face lower default risks.
Strained External Financing Needs for At-Risk Sovereigns
S&P’s analysis showed that many sovereigns facing foreign-currency default, including nations like Cyprus, Grenada, and Greece, struggle with gross external financing needs far exceeding their current account receipts and foreign exchange reserves. This mismatch between external obligations and available resources heightens the risk of default, especially in economies with existing external imbalances.
Conclusion
S&P Global’s projections signal increasing concern about the sustainability of sovereign debt in many countries. With rising borrowing costs and external imbalances posing significant challenges, managing foreign-currency obligations will be critical for many sovereign issuers in the coming decade. As governments face these mounting risks, the ability to navigate economic volatility and external debt pressures will be crucial for maintaining fiscal stability and avoiding default.
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