Page 30 - Issue 59

ELITE
Vol.1

Issue 59

September
2023

Bad luck or bad policies

Abdelrahman Sakr
Second year - Economics - English section

According to a report published by World and they scrambled once interest rates had
Bank Group in 2020, there is a 4th wave of risen again. Given that their bonds and
debt accumulation in EMDEs as total debt treasuries are riskier, they price their interest
has risen in more than 70 percent of EMDEs rates based on the fed. This implies that the
in each region and total debt-to-GDP ratios more excessively you borrow, the more you
have risen in almost 80 percent of EMDEs. By will be affected by the changes in the US
2022, debt-to-GDP ratio in EMDEs had interest rate. An analysis by the economist last
reached a new record of 254%. February implied the same thing. It has
Officials in these countries have been blaming forecasted Egypt to be the second most
their luck. They are partly right. Merely affected government by the hike interest rates.
recovering from the pandemic, they were hit This was based on its debt-to-income ratio of 4
hard by the war in Ukraine. Fuel and grain and percentage points of change in its interest
prices soared, putting more pressure on their rates from Q42019-Q42022. And in an analysis
budgets. But the most troubling effect was by Bloomberg in last September Egypt was the
rising interest rates, however. Grain prices second most country at risk of debt crisis -the
have already fallen to below war-levels and first was war-torn Ukraine- due to factors
brent oil prices have returned to two digits. including public debt and interest costs. Egypt
On the other hand, the fed has been raising was severely affected by the war and the
interest rates for the past year and is expected pandemic, the post-pandemic opening to be
to keep them high for a while. This has precise- because they led to high inflation in
affected the heavily indebted EMDEs severely. the US. Since the Fed started raising interest
It has raised financing costs for them and put rates Egypt has been struggling with an
more pressure on their currencies. external debt crisis, two devaluations of its
Root cause currency, and huge shortage in foreign
But it is not their luck that is broken, their currency. This is not a coincidence, of course.
policies are. The 4th wave shares the same All of them are mainly because of bad policies
pattern with the previous waves. Governments that led to high exposure to changes in the
had been tempted by low global interest rates Fed’s interest rates.
to the extent that they borrowed in amounts The First policy is excessive external
that exceed their ability to repay, meaning borrowing. In a research paper published in
they paid their old debts by taking new ones, Feb 2022, just one month before the fed started
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