The late Pope of Francis had dangerous opinions on many subjects, and so was the sustainability of sovereign debt burdens in emerging markets.
Francis’ speech during New Year’s Day this year called for “national leaders with Christian traditions to set an example by abolishing or greatly reducing the debts of the poorest countries.” The timing is appropriate: 2025 is one of the jubilee years of the Catholic Church, once every 25 years, and in traditionally debt is forgiven. The last one stimulated the creation of the inspired global 2000 campaign, which successfully advocated writing down sovereign debts in nearly 40 poor countries. South Africa chaired this year's National Trade Agreement country, and he also put the issue on the agenda.
However, it happens that the problems of low debt and middle-income countries have recently disappeared. Donald Trump’s tariffs and massive cuts in overseas aid may show contempt for welfare in developing countries, but emerging (middle-income) and border (low-income, higher-risk) markets perform relatively well.
Consulting capital economics calculates that although the proportion of debt-affected countries has increased, it is still far from causing the impact of the common 199 pandemic and Russian invasion of Ukraine. The company's measurement of EM currency risk has declined. It is an attractive fate to say this, but it seems that the EM world is emerging from a five-year turbulent period, hammering people who rely on exports and external capital.
In fact, purely by chance, Trump’s tariff war created a surprisingly benign environment for emerging markets. Although no one can directly claim that he is wisely managing part of the lower exchange rate, part of some fantastic "Mary Lago deal", the dollar weakens, benefiting EMS borrowed in U.S. currency. Traditional reverse effects, risk aversion arises from eccentric American decisions, actually lead to safe flights and raises the dollar to date. The net effect of unreliable trade strategies and weakened growth also reduces yields in the U.S. Treasury, which also supports capital flow to high-yield markets elsewhere. The difference in EM bond prices on U.S. bonds usually rises in financial market pressures and uncertainties, but remains full of restrictions.
While tariffs will create serious uncertainty for EMSs such as Bangladesh, Vietnam, Pakistan and Cambodia, which rely on exports to the United States, Trump's fire has been disproportionately concentrated in China. As a result, other emerging and border market exporters also gained relative access to the U.S. market.
Individually, some economies still have high risks of new financial turmoil. The capital notes that countries like Sri Lanka, Mozambique, Egypt and (for obvious reasons) Ukraine, Argentina, and Argentina, remain vulnerable to debt or currency risks, far safer than those such as Vietnam. But that also means that some of these countries (including Argentina and Egypt, especially Türkiye) have done their best to improve their public finances and reduce these dangers.
It would be unwise to predict infinite peace in low- and middle-income countries. Once Trump completes the tariffs on the tax rate, or more than that, he may start tax cuts, enough to raise interest rates and the dollar. China may also be a source of instability. Beijing always has risks that will decentralize the renminbi to offset the loss of competitiveness of U.S. tariffs and stay away from deflation, which will clearly affect other emerging markets.
If there is a return on risk avoidance, debt and monetary issues in EMS, then dealing with them is not perfect. Between China and other creditor countries, an attempt to establish a swift and predictable international debt damage mechanism has fallen into controversy, which has expanded the resolution of debt distress in Zambia and Sri Lanka over several years. The IMF and the World Bank are still small relative to the scale of global capital flows. Although Trump has always been a big supporter of creditors, and he and his company have paid back debts to him and his company, whether voluntarily or not, he is unlikely to expand the same treatment to the debtor government on behalf of the United States.
In this case, Pope Francis’ successor, Leo Fourteen, will undoubtedly be ready to accept extensive debt relief. But it seems unlikely that Trump will be the president of the United States, and he will get the same response that Pope John Paul II did from President Bill Clinton during the last Jubilee 25 years ago.
Emerging markets perform better than many investors expected. This is also true, given the situation of international decision-making is directed at the embattled debtor government.
alan.beattie@ft.com