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A Strong Dollar Is Wreaking Havoc on Emerging Markets. A Debt Crisis Could Be Next.

The average household in Ghana is paying two-thirds more than it did last year for diesel, flour and other necessities. In Egypt, wheat is so expensive that the government has fallen half a billion dollars short of its budget for a bread subsidy it provides to its citizens. And Sri Lanka, already struggling to control a political crisis, is running out of fuel, food and medical supplies.

A strong dollar is making the problems worse.

Compared with other currencies, the U.S. dollar is the strongest it has been in two decades. It is rising because the Federal Reserve has increased interest rates sharply to combat inflation and because America’s economic health is better than most. Together, these factors have attracted investors from all over the world. Sometimes they simply buy dollars, but even if investors buy other assets, like government bonds, they need dollars to do so — in each case pushing up the currency’s value.

That strength has become much of the world’s weakness. The dollar is the de facto currency for global trade, and its steep rise is squeezing dozens of lower-income nations, chiefly those that rely heavily on imports of food and oil and borrow in dollars to fund them.

But much of the damage is already behind us.

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“We are in a fragile situation,” Mr. El-Erian said. “Country after country is flashing amber, and some are already flashing red.”

Many lower-income countries were already struggling during the pandemic.

Roughly 22 million people in Ghana, or a third of its population, reported a decline in their income between April 2020 and May 2021, according to a survey from the World Bank and Unicef. Adults in almost half of the households with children surveyed said they were skipping a meal because they didn’t have enough money. Almost three-quarters said the prices of major food items had increased.

Then came Russia’s invasion of Ukraine. The war between two of the world’s largest exporters of food and energy led to a big surge in prices, especially for importers like Ghana. Consumer prices have gone up 30 percent for the year through June, according to data from the research firm Moody’s Analytics. For household essentials, annual inflation has reached 60 percent or more this year, the S&P data shows.

To illustrate this, consider the price of a barrel of oil in dollars versus the Ghanaian cedi. At the beginning of October last year, the price of oil stood at $78.52 per barrel, rising to nearly $130 per barrel in March before falling back to $87.96 at the beginning of this month, a one-year increase of 12 percent in dollar terms. Over the same period, the Ghanaian cedi has weakened over 40 percent against the dollar, meaning that the same barrel of oil that cost roughly 475 cedi a year ago now costs over 900 cedi, almost twice as much.

Adding to the problem are large state-funded subsidies, some taken on or increased through the pandemic, that are now weighing on government finances.

Ghana’s president cut fuel taxes in November 2021, losing roughly $22 million in projected revenue for the government — the latest available numbers.

In Egypt, spending on what the government refers to as “supply commodities,” almost all of which is wheat for its long-running bread subsidy, is expected to come in at around 7 percent of all government spending this year, 12 percent higher — or more than half a billion dollars — than the government budgeted.

As costs ballooned throughout the pandemic, governments took on more debt. Ghana’s public debt grew to nearly $60 billion from roughly $40 billion at the end of 2019, or to nearly 80 percent of its gross domestic product from around 63 percent, according to Moody’s.

It’s one of four countries listed by S&P, alongside Pakistan, Nigeria and Sri Lanka, where interest payments alone account for more than half of the government’s revenues.

“We can’t forget that this is happening on the back end of a once-in-a-century pandemic in which governments, to try and support families as best they could, did borrow more,” said Frank Gill, an analyst at S&P. “This is a shock following up on another shock.”

In May, Sri Lanka defaulted on its government debt for the first time in its history. Over the past month, the governments of Egypt, Pakistan and Ghana have all reached out to the International Monetary Fund for a bailout as they struggle to meet their debt financing needs, no longer able to turn to international investors for more money.

“I don’t think there is a lot of appetite to lend money to some of these countries,” said Brian Weinstein, co-head of credit trading at Bank of America. “They are incredibly vulnerable at the moment.”

That vulnerability is already reflected in the bond market.

In 2016, Ghana borrowed $1 billion for 10 years, paying an interest rate of just over 8 percent. As the country’s financial position has worsened and investors have backed away, the yield — indicative of what it would now cost Ghana to borrow money until 2026 — has risen to above 35 percent.

It’s an untenable cost of debt for a country in Ghana’s situation. And Ghana is not alone. For bonds that also mature in 2026, yields for Pakistan have reached almost 40 percent.

“We have concerns where any country has yields that calls into question their ability to refinance in public markets,” said Charles Cohen, deputy division chief of monetary and capital market departments at IMF.

The risk of a sovereign debt crisis in some emerging markets is “very, very high,” said Jesse Rogers, an economist at Moody’s Analytics. Mr. Rogers likened the current situation to the debt crises that crushed Latin America in the 1980s — the last time the Fed sought to quell soaring inflation.

Already this year, more than $80 billion has been withdrawn from mutual funds and exchange-traded funds — two popular types of investment products — that buy emerging market bonds, according to EPFR Global, a data provider. As investors sell, the United States is often the beneficiary, further strengthening the dollar.

“It’s by far the worst year for outflows the market has ever seen,” said Pramol Dhawan, head of emerging markets at Pimco.

Even citizens in some of these countries are trying to exchange their money for dollars, fearful of what’s to come and of further currency depreciation — yet inadvertently also contributing to it.

“For pockets of emerging markets, this is a really challenging backdrop and one of the most challenging backdrops we have faced for many years,” Mr. Dhawan said.

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Ratings Agency: Violence Could Undercut Israeli Economy

Violence in Israel could have “significant economic repercussions” if it leads to sustained conflict between Jewish and Arab citizens, the Fitch credit ratings agency said Thursday.

The warning from Fitch, whose views influence the interest rates paid by the Israeli government and Israeli corporations, was an indication of how rioting and mob attacks in cities like Lod could undercut the country’s recovery from the economic effects of the pandemic.

Fitch, noting that the Israeli economy has withstood past conflicts, said damage to the government’s creditworthiness would be limited “unless there is a substantial and sustained escalation in violence.”

If persistent strife prompts bond investors to demand higher interest rates on Israeli government debt, borrowing costs for businesses and consumers would also rise and act as a brake on growth.

Jewish and Arab citizens have clashed in the worst violence in decades in Israeli cities, in some cases dragging people from their vehicles and beating them severely.

The violence will make it more difficult for the leading political parties to form a stable government following elections in March that produced a stalemate. And the fighting will hurt the Israeli tourism industry, Fitch said.

The fighting will also hinder Israel from benefiting from better relations with other countries in the region, Fitch said. “The prospect of improved regional relations has receded further with the latest clashes,” Fitch said.

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How Debt and Climate Change Pose a ‘Systemic Risk to the Global Economy’

How does a country deal with climate disasters when it’s drowning in debt? Not very well, it turns out. Especially not when a global pandemic clobbers its economy.

Take Belize, Fiji and Mozambique. Vastly different countries, they are among dozens of nations at the crossroads of two mounting global crises that are drawing the attention of international financial institutions: climate change and debt.

They owe staggering amounts of money to various foreign lenders. They face staggering climate risks, too. And now, with the coronavirus pandemic pummeling their economies, there is a growing recognition that their debt obligations stand in the way of meeting the immediate needs of their people — not to mention the investments required to protect them from climate disasters.

The combination of debt, climate change and environmental degradation “represents a systemic risk to the global economy that may trigger a cycle that depresses revenues, increases spending and exacerbates climate and nature vulnerabilities,” according to a new assessment by the World Bank, International Monetary Fund and others, which was seen by The Times. It comes after months of pressure from academics and advocates for lenders to address this problem.

downgraded its creditworthiness, making it tougher to get loans on the private market. The International Monetary Fund calls its debt levels “unsustainable.”

nearly $600 billion in debt service payments over the next five years. Both the World Bank and the International Monetary Fund are important lenders, but so are rich countries, as well as private banks and bondholders. The global financial system would face a huge problem if countries faced with shrinking economies defaulted on their debts.s

“We cannot walk head on, eyes wide open, into a debt crisis that is foreseeable and preventable,” the United Nations Secretary General, António Guterres, said last week as he called for debt relief for a broad range of countries. “Many developing countries face financing constraints that mean they cannot invest in recovery and resilience.”

The Biden administration, in an executive order on climate change, said it would use its voice in international financial institutions, like the World Bank, to align debt relief with the goals of the Paris climate agreement, though it hasn’t yet detailed what that means.

flurry of proposals from economists, advocates and others to address the problem. The details vary. But they all call, in one way or another, for rich countries and private creditors to offer debt relief, so countries can use those funds to transition away from fossil fuels, adapt to the effects of climate change, or obtain financial reward for the natural assets they already protect, like forests and wetlands. One widely circulated proposal calls on the Group of 20 (the world’s 20 biggest economies) to require lenders to offer relief “in exchange for a commitment to use some of the newfound fiscal space for a green and inclusive recovery.”

debts soared, including to China, and the country, whose very existence is threatened by sea level rise, pared back planned climate projects, according to research by the World Resources Institute.

The authors proposed what they called a climate-health-debt swap, where bilateral creditors, namely China, would forgive some of the debt in exchange for climate and health care investments. (China has said nothing publicly about the idea of debt swaps.)

sinking under huge debts, including secret loans that the government had not disclosed, when, in 2019, came back-to-back cyclones. They killed 1,000 people and left physical damages costing more than $870 million. Mozambique took on more loans to cope. Then came the pandemic. The I.M.F. says the country is in debt distress.

Six countries on the continent are in debt distress, and many more have seen their credit ratings downgraded by private ratings agencies. In March, finance ministers from across Africa said that many of their countries had spent a sizable chunk of their budgets already to deal with extreme weather events like droughts and floods, and some countries were spending a tenth of their budgets on climate adaptation efforts. “Our fiscal buffers are now truly depleted,” they wrote.

In developing countries, the share of government revenues that go into paying foreign debts nearly tripled to 17.4 percent between 2011 and 2020, an analysis by Eurodad, a debt relief advocacy group found.

Research suggests that climate risks have already made it more expensive for developing countries to borrow money. The problem is projected to get worse. A recent paper found climate change will raise the cost of borrowing for many more countries as early as 2030 unless efforts are made to sharply reduce greenhouse gas emissions.

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