As policymakers across the developing world battle the persistent spread of coronavirus, they also face the economic threat of inflation — and not just at home.
Escalating price growth in major economies, in particular the US, is fuelling investors’ expectations of rate rises. That pushes up bond yields, making it more expensive for other countries to sell debt as buyers demand higher returns.
What should be good news — the beginning of a global recovery — has instead become a threat: that the cost of borrowing will hit dangerously high levels in countries such as South Africa and Brazil, throwing their already precarious public finances into disarray.
Inflation: A New Era?
Prices are rising in many major economies. The FT examines whether inflation is back for good.
DAY 1: Advanced economies have not faced rapidly rising inflation for decades. Is that about to change?
DAY 2: The global consensus among central bankers on how best to foster low and stable inflation has broken down.
DAY 3: The canary in the coal mine for US inflation: used cars.
DAY 4: How the virus disrupted official inflation statistics.
DAY 5: Why rising prices in advanced economies are a problem for indebted developing countries.
“Emerging economies should be worrying more about US inflation than about their own,” said Tatiana Lysenko, lead economist for emerging markets at S&P Global Ratings.
It is not just that inflation and rising yields in the US push up borrowing costs in the developing world, she said. The broader risk is that the US economy will power ahead of emerging economies, causing outflows from their stocks and bonds and, eventually, currency weakness.
While rich countries have been able to borrow during the pandemic at very low rates, many developing countries already face a much higher cost of finance.
Data from S&P show that refinancing costs for 15 of the 18 largest developed economies have fallen below their average cost of borrowing by more than a percentage point. Most are paying a fraction of 1 per cent. A 1 percentage point rise in financing costs would be easy for most to bear.
The same cannot be said of developing countries. Egypt, which must refinance debt equal to 38 per cent of gross domestic product this year, is paying an average rate of 12.1 per cent, above its average cost of 11.8 per cent, according to S&P. Ghana is paying 15 per cent, compared with an average of 11.5 per cent.
The danger lies not only in very high rates. Brazil has refinanced at an average rate of 4.7 per cent this year, lower than the average cost of its existing debt. But it did so by selling bonds that must be repaid more quickly than in the past.
This unpicks the work of years…
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