Posted Oct 3, 2022, 5:07 PMUpdated Oct 3, 2022, 6:29 PM
The financial fragility of emerging and developing countries is greater than what the G20 countries and the International Monetary Fund (IMF) are willing to admit. For the United Nations Conference for Trade and Development (Cnuced) the repercussions of the monetary policies conducted by the industrialized countries weaken these countries.
“The situation of developing countries is much more precarious than recognized by the G20 and other international financial forums”, warns UNCTAD in its latest report on trade and development, published on Monday. As the World Trade Organization recently indicated, UN experts indeed believe that the rapid rise in interest rates and the fiscal tightening of industrialized countries, combined with the multiple crises generated by the Covid-19 pandemic 19 and the war in Ukraine, have already turned weak global growth into a marked slowdown.
In short, the expected soft landing is less and less likely. “The current course of action hurts the most vulnerable, especially in developing countries, and risks tipping the world into a recession,” said UNCTAD Secretary General Rebeca Grynspan.
Worse than the 2008 crisis
The UN organization forecasts global growth of only 2.5% this year and 2.2% next year. For him, there is no doubt that the world is heading towards a recession and prolonged stagnation. The damage will be worse than that of the 2008 financial crisis and the Covid-19 shock in 2020. Developing countries will pay a heavy price.
Raising interest rates by major central banks is expected to cut future incomes of developing countries (excluding China) by an estimated $3.6 trillion, the report said. In a way, developing countries are trapped in the monetary policies of industrialized countries. They are encouraged to follow the same path. But, in view of the strong internal inflation, their key rates remain “negative in real terms” and, consequently, “monetary policy remains generally accommodating in many countries”.
Falling currencies
A situation which then calls for new monetary tightening to fight inflation and support the currency. At the risk of further hampering their activity. For the time being, UNCTAD expects the average growth rate of developing countries to fall below 3%, an insufficient rate to ensure sustainable development of their economy.
Another harmful consequence: the central banks of developing countries have no choice but to dip into their foreign exchange reserves to defend their currency. Nearly $380 billion in foreign exchange reserves have been monopolized to defend these exchange rates this year.
A total of 90 developing countries recorded a weakening of their currencies against the dollar. For 34 of them, the depreciation exceeds 10%. “Foreign exchange reserves are shrinking and spreads between bonds are widening, with a growing number of them posting yields 10 percentage points higher than those of US Treasury bonds,” warns Cnuced.
Nearly fifty developing countries risk experiencing a debt crisis in the future, if not a crisis in their balance of payments. Two indicators alert. The ratio of total external debt stock to exports has increased from an average of 100% in 2010 to 127% in 2021.
As for the cost of debt service in relation to public revenues, the percentage has increased well beyond 20%. This level “is not conducive to their future growth prospects,” the report said. Faced with the deterioration of the situation, UNCTAD is calling for more official development assistance and a wider, more permanent and fairer use of the IMF’s special drawing rights.
