The Club of Spanish Exporters and Investors shows concern about the financial deterioration of emerging countries and the consequences for Spain

Technical note from the Reflection Committee on Internationalization

He warns that many emerging countries are facing debt maturities this year that will have to be refinanced at much higher rates.

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El Club of Spanish Exporters and Investors, through its Reflection Committee on Internationalization, expresses its fear of the “even more severe” financial deterioration that several emerging countries in 2023, until reaching the “default” edge, because most are facing debt maturities this year that will have to be refinanced at much higher rates, which will increase debt service in the coming months and years.

 

The latest technical note prepared by the Reflection Committee on Internationalization, entitled “An analysis of the risk of public debt and exchange rate crises in emerging economies in 2023”, of which he is the author Ángel Rodríguez García-Brazales, professor of Fundamentals of Economic Analysis and director of the School of Economic Intelligence and International Relations of the UAM, points to Pakistan, Egypt or Colombia as the emerging countries with a more critical situation, to which we should add, due to their proximity to Spain, Algeria and Morocco.

 

"This tightening of monetary policy can cause a public or financial debt crisis in heavily indebted economies. If central banks continue to raise interest rates, either to contain inflation or to contain a disorderly depreciation of their currencies, then debt service (which includes interest payments) will increase. This can aggravate investors' fears and cause massive sales of their positions in the country's public debt, which would put states on the brink of bankruptcy,” says the professor Ángel Rodríguez García-Brazales in his report.

 

The United Nations Development Assistance Program, which in a recent report warned of the risk of public debt crises in 54 emerging and developing countries. The authors expressed their concern in economic, geopolitical and humanitarian terms, since together they have 18% of the planet's population, although they represent only 3% of the world's GDP.

 

The technical note points to Pakistan, Egypt and Colombia as the emerging countries with a more critical situation, to which we should add, due to their proximity to Spain, Algeria and Morocco.

 

Pay attention to the evolution of Morocco and Algeria

 

The expert considers that, although a destabilization of emerging economies such as Egypt, Mexico or Colombia would have little impact on Spanish exports, since they only represent 0,5%, 1,38% and 0,33% of our sales abroad, the situation would be different from the point of view of the foreign direct investment from Spain abroad. "Although more than 53% of our investments abroad have been concentrated in the European Union, the United Kingdom and the United States, two important emerging economies such as Mexico or Brazil represent between them more than 15% of the total, so given the risk "In the event of a negative debt event, the valuation of assets invested in these countries may suffer a notable downward correction if their exchange rate depreciates," warns the expert.

 

For the Reflection Committee on Internationalization, Morocco and Algeria are the countries in which a negative debt event could have a greater impact in Spain and by extension in Europe, especially for the geopolitical implications. “Morocco faces debt maturities in 2023 equivalent to more than 10% of its GDP and Algeria more than 6%. The combination of depreciation of their currencies, high food prices and deterioration of public accounts in Morocco and Algeria can have important geopolitical repercussions in the region and even internally within the EU. Migratory pressure could increase in the Mediterranean to critical levels, which would imply a serious diplomatic conflict between the Maghreb and the EU, with its epicenter in Spain,” he points out.

 

“Extremely parsimonious” attitude of the IMF

 

In view of the risk of exchange rate instability presented by some countries with which Spain has significant economic relations, the Reflection Committee on Internationalization recommends providing international support to these countries to stabilize their economies. However, he warns of an “extremely parsimonious attitude on the part of the International Monetary Fund in the amounts of the aid programs”, with the risk that these countries will ask for additional financing from China, as they have been doing in some countries in recent years under the umbrella of the initiative Belt and Road.

 

He also considers necessary "decided action by Spanish economic diplomacy to encourage the IMF and these countries reach agreements that are economically and politically viable to stabilize their economies in the short and medium term.”

 

Finally, he advises Spanish exporting and investing companies tobe especially vigilant in 2023 regarding its operations in some emerging countries. “A debt crisis and a depreciation of their currencies can mean that the value in euros of the direct investments they have made there decreases considerably. It can also affect their exports to the extent that a devaluation of their currencies can raise the price, in local currency, of the exported goods and services, and, therefore, they lose local market share," he warns.