As per the latest Political Risk Index report from WTW, elevated government expenditures during the pandemic, global inflation, and increased interest rates in 2023 have contributed to an “escalating debt crisis in emerging markets.”
Evan Freely, Global Head of Financial Solutions, WTW, commented, “A conveyor belt of economic shocks has hit the world’s most vulnerable countries hard.
“Emerging market governments may look for less transparent short-term financing, accepting higher interest rates in return for fewer conditions, however this increases both humanitarian and business risks.
“Geopolitics is complicating an already difficult situation, and these trends should be carefully monitored from a risk management perspective.”
WTW’s report observed that political challenges may make it increasingly difficult for multilateral institutions, including the International Monetary Fund (IMF) and the World Bank, to play their traditional crisis management roles, which could heighten the political and economic risks associated with debt crises.
“Partly because of intensified geopolitical competition, the politics of sovereign debt restructuring following debt crises have become increasingly complicated with countries more likely to turn to non-traditional bailout options as a result,” WTW said.
The firm’s report also noted that climate change is likely to become an increasingly important driver of crises of debt sustainability, “necessitating reform of the international debt and financial architecture.”
WTW added, “Cuts in government spending are likely to trigger protests linked to austerity, which are already on the rise particularly in low-income countries. Countries with a high ratio of public interest payments to public revenue may be most vulnerable to sovereign debt crises in the near to medium term.”
