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Sovereign defaults are expected to increase in the next decade as poorer countries struggle with significant debt burdens and the impact of high borrowing costs, according to S&P Global Ratings.
Despite the current downward trend in global interest rates and the successful exits from default by countries like Zambia and Sri Lanka, many nations are still facing challenges in servicing foreign currency debts and accessing capital.
According to the rating agency, “Due to higher debt levels and rising borrowing costs on hard currency debt, sovereign defaults on foreign currency debt are projected to be more frequent over the next 10 years.”
This warning comes at a time when countries emerging from default are grappling with securing deals from a diverse range of creditors and obtaining sufficient relief to prevent another debt crisis.
Countries like Kenya and Pakistan have narrowly avoided defaults this year with the help of new IMF bailouts and other loans, but they continue to face difficulties in refinancing their debts due to high borrowing costs.
Recent successful bond restructurings by countries like Ghana, Zambia, and Sri Lanka have provided some relief, but these nations have committed to increased payments on their restructured bonds based on economic performance targets.
However, the possibility of repeat defaults remains a concern, as countries emerging from debt restructurings now have lower credit ratings compared to the past.
Factors such as fiscal policies and the ability to attract foreign capital will play a crucial role in determining the likelihood of defaults in the future.
While there is no single early warning sign of a sovereign default, governments that allocate a significant portion of their revenues to interest payments are at higher risk.
Countries with significant debt maturities relative to reserves, such as the Maldives and Argentina, face challenges in meeting their financial obligations.
In the next decade, unconventional debt management strategies like buyback operations are expected to become more common, leading to a shift in the nature of defaults.