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A strong dollar is wreaking havoc in emerging markets: a debt crisis could be just around the corner

Special for Infobae of New York Times.

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

A strong dollar is making the situation worse.

Compared to other currencies, the US dollar is stronger than it has been in two decades. It is rising because the Federal Reserve has raised interest rates dramatically to combat inflation and because America’s economic health is better than most. Together, these factors have attracted investors from around the world. Sometimes they only buy dollars, but even if investors buy other assets, such as government bonds, they need dollars to do so, and in each case they drive up the value of the currency.

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

“We are living in a world with small fires everywhere,” said Mohamed El-Erian, president of Queens’ College, part of the University of Cambridge, and a former chief executive of Pimco, a $2 trillion bond manager. . “If we don’t pay attention, those little fires could get much bigger.”

Higher food and energy costs as a result of Russia’s war with Ukraine are already hurting some emerging market countries. The rising dollar, whose strength is measured against a basket of currencies representing America’s major trading partners, has exacerbated those problems by making it even more expensive to import vital goods through weaker currencies.

A strong dollar forces countries to use more of their own currencies to buy the same amount of goods. That higher price means they are inadvertently importing more inflation along with their grain and fuel. And because they borrow dollars, they must pay interest in dollars, adding to their financial hardship.

Some countries are already delinquent. Others walk a tightrope. A sovereign debt crisis could soon spread, wrecking the fragile recovery from the pandemic and amplifying the likelihood of a severe global recession.

“The landscape is looking a little shaky at the moment,” said Leland Goss of the International Capital Markets Association, a trade organization. “There seems to be a consensus that for the first time in quite some time we might be facing restructuring not one, but a whole bunch of countries.”

So far this year, four emerging market countries have defaulted on their debts, according to S&P Global Ratings: Russia, Sri Lanka, Belarus and Ukraine. Ten other countries are in “severe tension”: Argentina, Lebanon, Ghana, Suriname, Zambia, Ethiopia, Burkina Faso, Republic of Congo, Mozambique and El Salvador, according to the rating agency. Of the 94 emerging market sovereigns that S&P rates worldwide, more than a quarter have B minus, a low-quality rating indicating a high-risk investment.

The bleak situation is part of the collateral damage from Russia’s war with Ukraine and the Federal Reserve’s fight against inflation, and highlights the global connections that have left the fate of countries around the world inextricably tied to decisions made in Moscow and Washington DC

“We are in a fragile situation,” El-Erian commented. “Country after country is on a yellow light and some are already on a red light.”

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

Some 22 million people in Ghana, a third of its population, reported a decline in income between April 2020 and May 2021, according to a study by the World Bank and UNICEF. Adults in nearly half of the households with children enrolled in the study said they weren’t eating all their meals because they didn’t have enough money. Nearly three-quarters responded that the prices of major food items had increased.

Then came the Russian invasion of Ukraine. The war between two of the world’s leading food and energy exporters has led to a huge increase in prices, especially for importers like Ghana. Consumer prices increased 30 percent for the year ending June, according to data from research firm Moody’s Analytics. For essential household goods, annual inflation this year has hit 60 percent or more, according to S&P data.

To illustrate this, let us consider the price of a barrel of oil in dollars against the Ghanaian cedi. At the beginning of October last year, the price of oil was at $78.52 a barrel, rising to nearly $130 a barrel in March before falling to $87.96 earlier this month, up 12 percent for a year in dollar terms. Over the same period, the Ghanaian cedi has weakened by more than 40 percent against the dollar, meaning that the same barrel of oil that cost almost 475 cedis a year ago now costs more than 900 cedis – almost twice as much.

Compounding the problem are large state-funded subsidies — some started during the pandemic or increased throughout it — that are now a drain on government finances.

“We cannot forget that this is happening in the final part of a pandemic that had not occurred in a century in which governments did ask for more money to try to support families in the best possible way,” said Frank Gill. , S&P analyst. “It is a crisis after another crisis.”

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

“I don’t think there’s a lot of interest in lending money to some of those countries,” said Brian Weinstein, co-head of credit transactions at Bank of America. “They are incredibly vulnerable right now.”

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

More than $80 billion has been withdrawn so far this year from mutual funds and sector and index-stock funds — two popular types of investment products — that buy emerging-market bonds, according to EPFR Global, a provider of data. When investors sell, the United States is often the beneficiary, further strengthening the dollar.

“This is by far the worst year for outflows the market has ever seen,” said Pramol Dhawan, director of emerging markets at Pimco.

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