London: More emerging-market countries are being pushed to the brink of debt crises by unprofitable state-run businesses, according to Reza Baqir, the head of Alvarez & Marsal Inc.’s sovereign debt advisory business.
“In many countries, the reason they have unsustainable levels of debt is because of the role of state-owned enterprises that have bled the government coffers,” said Baqir, a former official at the International Monetary Fund and ex-governor of the State Bank of Pakistan told Bloomberg News.
While debt levels are at historic highs, there haven’t been any sovereign defaults since those declared by Ghana and Sri Lanka last year. But the developing world’s debt problem has only been delayed, not defused, said Baqir, who oversaw the IMF’s bailout program in Egypt.
Bonds from many emerging-market countries are trading as distressed credits because of the drain from state-owned enterprises and weak tax collection, he said.
A low ratio of tax revenue to interest payments is a strong predictor of sovereign solvency stress, he added.
As many as 15 emerging and frontier markets are trading at distressed levels, including Egypt, Bolivia, Pakistan and Argentina, according to a Bloomberg index tracking sovereign dollar debt.
Alvarez & Marsal, a consultancy best known for advising on corporate turnarounds, hired Baqir this year for a new unit that counsels emerging-market governments. The firm won a contract this month to advise Sri Lanka on its economic reform program as it restructures debt and divests ownership in the Sri Lankan Insurance Corp.
Out of 90 state-owned companies in sub-Saharan Africa, 40 percent are unprofitable while the majority are illiquid and overleveraged, according to an IMF study. Most recently, the IMF pointed at state firms as a drain on public finances in Sri Lanka.
The IMF data shows emerging markets’ government debt stood near a record 64.6% of GDP in 2022, while this was 88% for low-income developing countries.
Baqir also argued for more transparency in lending terms for emerging markets to help prevent future debt crises. Before serving as governor of Pakistan’s central bank, Baqir was at the IMF for almost two decades, working on restructurings in Greece, Jamaica, Ukraine, and leading the lender’s delegation to the Paris Club.
Debtor countries often have very little leverage in negotiations with official creditors, he said, citing his experience on both sides of that equation.
“Sunshine is the best disinfectant and in today’s age of social media and open access, information about the terms would by itself be a deterrent to contract debt at unsustainable rates,” he said.