Tracking sovereign stress in 45 emerging markets

Chart Spotlight: Tracking sovereign stress in 45 emerging markets

Today’s charts are an update of the Sovereign Vibe sovereign debt stress tracker initially released in 2023. This tool is based directly on the IMF’s Debt Sustainability Framework for Market-Access Countries, released in 2021, and is relevant only for countries that “principally receive financing through market-based instruments and on non-concessional terms.” Through extensive testing, the IMF developed a model that measures the probability of a borrowing country experiencing sovereign debt strains in the near-term based on changes in nine macroeconomic and governance variables.

Results

Among middle- and lower-income countries with market access with full data availability across all indicators, Argentina, Angola, and Pakistan are most at risk of sovereign debt stress. In the heatmap below, brighter colors indicate more risk, while darker colors indicate less risk. I use percentile scoring for each variable, including the probability of sovereign stress outcome.

Argentina defaulted on local currency debt in 2023, which penalized the country via the “stress history” indicator and propelled it into the “top” spot. The sovereign defaults that I tallied based on S&P for 2023 are El Salvador, Cameroon, and Ethiopia on foreign currency debt and Argentina, Ghana, El Salvador, Mozambique, and Sri Lanka on local currency. Let me know if I am missing any!

Caveats

Regarding the other 2023 sovereign defaults, El Salvador registered as sixth-most at risk of sovereign stress. I would expect Sri Lanka to rank fairly high on the sovereign stress heat-map above. But data for Sri Lanka has been patchy since its 2022 default, preventing me from making a full calculation on the same footing as other countries.

The IMF does not consider Cameroon, Ethiopia, Ghana, and Mozambique to currently be MACs. Other countries are borderline. For instance, Angola has been a market-access country for several years, but it seems like the IMF is in the process of declassifying it due to current vulnerabilities. So I may remove Angola from the next update. On the other hand, Nigeria still seems to be within the IMF’s MAC perimeter.

Also, this tracker shouldn’t be taken as gospel as to the likelihood of sovereign stress, as it only reflects macroeconomic-related indicators and which are mostly backward-looking. It fails to capture the qualitative aspects of a government’s commitment to reforms. Case in point: I wrote of Egypt’s brightening prospects last week.

Changes since October 2023

The table below outlines changes in the ten MACs most at-risk of experiencing sovereign debt strains. Argentina, Nigeria, and Ukraine have deteriorated by climbing up the ranking. Angola, Pakistan, Egypt, Jordan, Ecuador, Belize, and Mexico have seen their rankings improve. El Salvador continues to occupy the sixth spot.

I was surprised to see Mexico in October’s top ten, which points to some of this tool’s analytical limits. I and many others have generally perceived Mexico as a positive EM story in recent years, with an economy benefiting from supply chain reconfigurations and near-shoring, and an appreciating peso. Nevertheless, this IMF model can help challenge consensus narratives: in fact, Mexico is penalized precisely because of the strong appreciation of its real effective exchange rate over the past three years.

Headline Roundup

Sovereign Debt

• IMF & SDRs:

  • Use of SDRs in the Acquisition of Hybrid Capital Instruments of the Prescribed Holders

  • The IMF Approves a New Use of SDRs! What’s Next?

• New York: Sovereign Debt Legislation in the State of New York: How a Compromise Might Look Like

• EM bonds:

  • Three reasons emerging market bonds still look attractive

  • Emerging market junk bonds are top performers in sovereign debt markets

• Angola: Angola agrees deal with Chinese state bank to ease debt crunch

• Jordan: First in 21 years: Jordan’s credit rating upgraded to Ba3

• Climate:

  • Debt, Climate and the Pressing Need for Collaboration: Insights from the 2024 IMF/World Bank Group Spring Meetings

  • Preventing a Default on Development and Climate: How Debt Relief Can Support Development Efforts for over 1 Billion People

• ECB: High debt levels put Europe at risk of ‘adverse shocks’, ECB warns

• United States: Bridgewater founder Ray Dalio warns of danger of US debt to Treasury market

Emerging markets & developing economies

• Slovakia: Slovak premier Robert Fico shot and injured

• Turkey: Turkey’s World-Beating Lira Carry Trade Has Room for More Gains

• Kenya: Kenya’s 15% Infrastructure Bond Tax May Dent Foreign Demand

• South Sudan: South Sudan on Edge as Its Neighbour’s War Disrupts Oil Exports

• Gabon: Panoro Energy discovers 20 million-barrel oil well

• Development:

  • What will the world look like in the next 25 years?

  • Two Futures for Global Development

  • The First Trillion is the Hardest: How to Raise the Necessary Funds for Poor Countries’ Climate Mitigation Investments

Deglobalization

• Oil: The axis of evasion: Behind China’s oil trade with Iran and Russia

• United States:

  • US sharply raises tariffs on Chinese EVs and semiconductor imports

  • US set to impose 100% tariff on Chinese electric vehicle imports

  • America is pulling up the drawbridge

• China: China’s Factory Glut Alarms the World But There’s No Quick Fix

• Russia: Russian court seizes assets worth €463mn from Italy’s UniCredit

• Europe: Can Europe’s economy ever hope to rival the US again?

De-dollarization

• Strong dollar:

  • The Strong Dollar and the War in Ukraine

  • A Strong U.S. Dollar Weighs on the World

  • The Strong Dollar, and Why It Matters

  • Should the United States Try to Weaken the Dollar?

• Ukraine: Ukraine - running thru the numbers

• Russia-China: Putin’s trip to China may show US threats are wishful thinking

• Japan: The yen's travails in an era of geopolitical rivalry

• IMF: Dollar remains dominant in global trade, but global tensions are fragmenting the world

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