EMs are facing a “nightmare” from US interest rate hikes: An enduring period of interest rake hikes from across the pond is fuelling a “silent debt crisis” among many developing countries saddled with high foreign-currency debt piles, World Bank deputy chief economist Ayhan Khose warned in an interview with the Financial Times yesterday.

More countries are feeling the pinch: The sovereign debt of almost one quarter of emerging and developing countries is now trading at distressed levels (i.e. 10 percentage points or more higher than rates on US government bonds), the World Bank said. In 2019, the proportion of EMs with distressed debt was less than 5%.

Where it started: Higher global interest rates plus a stronger USD over the past 18 months have made debt more expensive for developing economies to pay off, contributing to a sharp sell-off in emerging-market bonds. Even though central bank rates are close to reaching their peak, investors have continued to remain on the sidelines on expectations that they will have to stay higher for longer, stymying the prospects of recovery for the asset class.

We’re among the most vulnerable: Egypt has the highest interest bill as a percentage of GDP globally and one of the world’s highest gross government debt-to-GDP ratios, leading Bloomberg to list us as the second-most vulnerable country in the world to a debt crisis. Rising rates and the fallout from the war in Ukraine has heaped pressure on Egyptian bonds, with yields on Egyptian 10-year bonds surging 75% since the beginning of 2022. The bonds are now trading almost 2,150 bps above US 10-years.

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