beyondbrics

A report released by the World Bank this week made for bleak reading, warning that developing countries with large funding requirements could face a crippling credit squeeze.

But which are particularly vulnerable, and which are – relatively speaking – safe? Chart of the Week investigates.

To clarify: the red bars show forecasts for each country’s current account deficit in 2012, as a proportion of GDP. In orange are their scheduled payments on short-term and longer-term debt to private creditors. In sum, they show how much external financing the countries need over 2012.

(Note that the World Bank provides data for 30 countries; for simplicity, we show 10 interesting cases here.)

According to the World Bank:

Tighter financial conditions could make financing current account and government deficits much more difficult Should risk aversion escalate further, international capital flows could decline even more, forming a binding constraint on the balance of payments of some countries, potentially freezing some governments out of capital markets and even threatening the fiscal sustainability of some heavily indebted developing countries by raising borrowing costs.

It gets worse. Neil Shearing, an analyst at Capital Economics, told beyondbrics that the World Bank figures looked to be on the low side – perhaps omitting short-term debt in the countries’ banking system that had been rolled over by their banks’ parent companies.

The macroeconomic picture in eastern Europe looks particularly ominous, Shearing noted.

“The debt is a weight around Eastern Europe’s neck… the legacy of high borrowing in the last decade, especially between 2004 and 2008,” he said.

Bulgaria’s scheduled payment on its debt in 2012, at 18.6 per cent of GDP, is the highest of any country listed – with Latvia not far behind. Consequently, neither country can afford to run much of a fiscal deficit – indeed, Bulgaria is projected to run a surplus in 2012 – severely restricting options when it comes to stimulating growth.

On the face of it, Turkey also looks in pretty bad shape, but Shearing was more bullish on its prospects. Turkey is likely to suffer a recession in the short-run, he says, but it should recover quickly. Only around ten per cent of the country’s debt is denominated in foreign currencies – meaning that even if external financing dries up, there remains the powerful option of depreciating the lira.

Compare that to Romania, which must pay back around two-thirds of its debt in foreign currency. Bulgaria and Latvia are in similar positions, restricting the tools available to their policy makers even further.

On a more positive note, Latin America comes out in relatively good shape. In a worst-case scenario – in which the eurozone collapses in a disorderly way, with severe implications on credit availability in the developing world (among other things) – Shearing believes that Latin America would be more insulated than eastern Europe. Though many of  Latam banks are also owned by western Europe’s major lenders, they are not as reliant on their parents for financing, he says.

Related reading:
World Bank warns emerging nations, FT
Emerging markets’ golden age is at an end, FT
Emerging market consumers tighten their belts, FT
Markets: doom and gloom everywhere, beyondbrics