By Rebecca Ray
On February 7, major global creditors will meet at the Global Sovereign Debt Roundtable (GSDR) to address the continuing debt crisis among emerging market and developing economies (EMDEs), which have faced a confluence of crisis factors – including continued slow growth and high fiscal demands from the COVID-19 pandemic and high-interest rates from high-income countries’ attempts to arrest recent inflation. The work of the GSDR is particularly pressing this month, coming on the heels of the Global Stocktake of the Paris Agreement, showing definitively that the world is not on track to avert catastrophic climate change and that immense amounts of sustainability finance is urgently needed.
Amidst these discussions, a new report from the Boston University Global Development Policy Center uses newly released data to explore the connections between two unfolding crises: the immediate need for debt relief among EMDEs and the ongoing imperative for climate and biodiversity finance.
EMDE debt is widely held among four main classes of creditors: multilateral development banks (MDBs), bondholders, Paris Club creditors, and China. Among these four classes, China has the least number of major borrowers: 41 countries, compared to 93 for MDBs, 57 for bondholders, and 45 for Paris Club creditors.
However, China’s major borrowers are more likely to face high environmental investment needs and less likely to be able to access capital markets for those investments than any other creditor class’s major borrowers. Thus, China has the potential to make a significant impact by participating in global efforts at debt restructuring and capital mobilization for shared sustainability goals.
Looking across four types of sustainability investment needs and opportunities (land and marine conservation and climate change mitigation and adaptation), we examined each country’s needs relative to other countries around the world. Most of China’s major borrowers (25 out of 41) have needs above the global median for at least one type of climate change investment and at least one type of conservation investment, shown in red in the map below.
An additional 14 of China’s major borrowers have high climate needs but below-median conservation opportunities (orange). Just one of China’s major borrowers – the Kyrgyz Republic – has above-median conservation but below-median climate needs (yellow), while one borrower – Tajikistan – has below-median needs for both climate and conservation (blue).
China’s major borrowers are more heavily tilted toward high sustainable investment needs than any other major creditor class, as seen in the image below. To be sure, MDBs as a class have over twice as many major borrowers as China. As such, their importance – and participation – in global debt relief and capital mobilization cannot be overstated. However, China’s portfolio of major debtors is more heavily tilted toward countries with high sustainable investment needs and opportunities, meaning that debt relief and concessional finance can make a significant difference in bringing shared sustainability goals within reach for this group of countries.
Given the high level of need for climate and conservation investment across EMDEs, are these countries able to access what they need on the capital market?
According to the International Monetary Fund and the United Nations Development Programme, 62 countries around the world are currently facing or are at high risk of debt distress, meaning they face severe limitations on new borrowing. We identify an additional 33 EMDEs who face capital market constraints, or significant obstacles to raising new capital, as their sovereign bonds are either expensive (with rates higher than projected economic growth) or rated below “investment grade” by major credit rating agencies. Concomitantly, just 13 EMDEs have relative capital market access – though even these countries face limitations, such as domestic bond rates above GDP growth.
China’s portfolio of major borrowers is the most heavily tilted toward debt distress of any major creditor class, as shown in Figure 3. In order to be effective with this group of borrowers, China’s role in mobilizing capital for sustainable development must extend beyond issuing more loans, as these countries do not have the fiscal space to sustainably take on additional debt.
China can play a significant role through approaches such as the “Shanghai Model” proposed by Director Zhou Chengjun of the People’s Bank of China Financial Research Institute, which envisions restructuring existing loans as guaranteed bonds at more concessional rates, which can then be resold. China can also support broader reforms to the global financial architecture, such as MDB capital increases and quota reforms to increase the voice and representation of EMDEs.
The report makes recommendations for all major creditor classes as well as for the broader global financial architecture. For example, it recommends that debt restructuring efforts incorporate ‘fair’ comparability of treatment principle across all creditors, adjusting the amount of debt relief provided by various creditors according to the level of ex-ante debt relief in initial loan commitments. This step can facilitate greater participation by creditors who issued initial lending with more concessional lending terms, such as MDBs and China’s concessional lending windows.
It is within the grasp of world leaders to harness global capital for achieving shared sustainable development goals, even at a moment of converging crises. The work of the GSDR this week is an important step forward. Due to the unique characteristics of its major borrowers, China has a crucial role to play in these negotiations and in the work that lies ahead.
Rebecca Ray is a Senior Academic Researcher at the Boston University Global Development Policy Center. Follow her on X: @BUBeckyRay.