At Manhattan’s luxe Pierre hotel on a late September morning, Adebayo Olawale Edun, the finance minister of Nigeria, tried to soothe the jitters of Wall Street bankers. Over croissants and fresh-squeezed orange juice, he pledged that his country would cut spending and collect more in taxes to make the crushing debt payments owed to foreign investors. For Edun, a former investment banker and World Bank economist, it could hardly have been a more important audience: a presentation sponsored by Citigroup Inc., one of the world’s biggest underwriters of international bonds.
Tucked inside the materials distributed to the crowd, one item suggested the challenge of his task, according to people who were there but requested anonymity to discuss a private meeting. The document showed that Nigeria’s 2022 debt payments, the equivalent of $7.5 billion, surpassed its revenue by $900 million. In other words, it had been borrowing more just to keep paying what it already owed.
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A debt crisis is brewing across the developing world as a decade of borrowing catches up with the world’s poorest countries. In 2024 these nations, known to rich-world investors as “frontier markets,” will have to repay about $200 billion in bonds and other loans. The bonds issued by Bolivia, Ethiopia, Tunisia and a dozen other countries are either already in default or are trading at levels that suggest investors are bracing for them to miss payments.
The situation is especially grave, because these nations have small domestic markets and must turn to global lenders for cash to spend for hospitals, roads, schools and other vital services. As the Federal Reserve vows to keep US interest rates higher for longer, a once-ebullient market for debt from those countries is drying up, cutting them off from more borrowing and adding to the many rate-related risks of 2024. “The punch bowl has been taken away,” says Sonja Gibbs, a managing director of the Institute of International Finance, which represents private and central banks, investment managers, insurers and others in the industry. “Global rates are considerably higher, and the incentive to invest in these markets is challenging when you can get 4% or 5% in US Treasuries.”
A series of global shocks sparked the crisis. During the Covid-19 pandemic, rich nations printed money to hand out stimulus checks; poor ones had to borrow to keep their economies running. The easy-money policies in the wealthy world meant that investors were happy to lend in search of higher rates. Then, poor countries faced higher food import costs caused by the Russia-Ukraine war, combined with a global spike in inflation. The timing could hardly have been worse. Including government, corporate and household borrowing, the debt of the 42 countries the Institute of International Finance classifies as frontier markets reached $3.5 trillion in 2023, a record and about twice as much as a decade ago.
To stay solvent, many of these governments are slashing spending as debt payments consume their budgets. Already, some 3.3 billion people—about half of the world’s population—are living in countries that spend more on debt payments than on education and health care, according to the United Nations Conference on Trade and Development. In places such as Gabon, where President Ali Bongo Ondimba was unseated in a coup in August, tight budgets are leading to political upheaval.
“If this were the developed world, we’d already be calling it a debt crisis,” says Penelope Hawkins, a senior economist at the UN trade agency. “However many countries end up defaulting in the formal sense of the word is irrelevant: Right now, developing countries are diverting the resources that are needed for development to service their debt.” Investors in frontier nations’ debt and equity are bracing for pain. Some of the biggest holders are funds managed by BlackRock, Franklin Templeton and T. Rowe Price Group.
Unlike the US and other countries that issue debt in their own currency, frontier countries can’t ease their burden through inflation, by printing money. They often issue debt payable in another country’s currency through eurobonds. “This is the worst crisis in the last 30 years for these countries,” says Mattias Martinsson, partner and chief investment officer at Sweden’s Tundra Fonder AB, which manages equity funds dedicated to frontier markets. “These markets are not constructed in a way that can manage these eurobond issuances in cycles like these.”
After the Pierre presentation, the Nigerian finance minister had a one-on-one meeting with Citigroup Vice Chairman Jay Collins. Edun dutifully took notes as the American executive spoke. Edun had just informed US investors that Nigeria had access to the World Bank for a loan, which would mean taking on $1.5 billion more in debt but also afford more breathing room. In an interview afterward, Edun suggested that foreign direct investment and remittances from families living abroad could return and stabilize the nation’s currency, the naira. “Very quickly you can get a situation when a lot more comes in from remittances and FDI, including from companies that are already in Nigeria,” he said. Back home, Edun exuded confidence. “There is more to be done, but Nigeria is definitely on the right path,” he told reporters in October.
But the country was still struggling. The naira had plunged in a free fall, and inflation surged to an 18-year high as the government started to scrap a popular but costly fuel subsidy. Investors that month demanded an extra 7.6 percentage points over similar US Treasuries to hold debt from Nigeria, according to data from JPMorgan Chase & Co. President Bola Ahmed Tinubu said in late November that budget cuts would reduce the government’s deficit and help it keep servicing debt. Nigeria, an OPEC member that’s produced oil since the late 1950s, may muddle through and keep Wall Street at bay.
Yet its own citizens are growing impatient with the austerity necessary to keep up with interest payments. The country, Africa’s most populous, spends less on health care as a proportion of its budget than it did a decade ago, according to civic organization BudgIT, based in Lagos. The nation’s maternal death rate, 1 047 per 100 000 live births, is one of the world’s worst—more than 30 times higher than in the US. A leading cause of death: late diagnoses of preeclampsia, a pregnancy complication marked by high blood pressure and kidney damage.
At a public hospital in Lagos, a pediatric nurse says she cares for as many as 20 newborns at once, about five times as many as recommended. Babies die in the hospital because of the staffing shortages and lack of oxygen, power and fuel for backup generators, says the nurse, who asked for anonymity because she’s not authorized to speak about hospital conditions.
In a statement, Nigeria’s Federal Ministry of Health called the infant and maternal mortality rates “a huge concern” for Tinubu’s government, saying they mostly “stem from poor health infrastructure due to limited fiscal capacity and resources.” The government plans to prioritise funding for critical areas, including immunization and maternal and child health and nutrition, and increase spending on health care in 2024.
A July 2022 trade union rally in Ikeja, north of Lagos, in support of striking university staff. Image: Pius Utomi Ekpei/Getty Images
In Ghana, Jean Adomfeh, a doctor, recalls a mother who arrived at a clinic with a 3-year-old so malnourished the child weighed about as much as a healthy 1-year-old. Still, the woman left empty-handed, with no ready-to-use therapeutic foods. “After she left, there were sad whispers around the clinic saying the child would likely not make it to the next shipment,” says Adomfeh, who’s now studying ophthalmology at Duke University in Durham, North Carolina. She sees a correlation between the lack of spending on health care and a financial system that favors established nations and leaves places like Ghana “with unsustainable interest rates and debt burdens.”
Similarly, Pakistan spends eight times as much on interest payments, currently about $28 billion a year, as it does on health care. The government can’t afford ambulances, so communities rely on private services. In Badin, a rural farming region in southern Pakistan, the government hasn’t found the money to hire a cardiac surgeon at a hospital it had equipped with state-of-the-art surgical tables and defibrillators, according to Hasnain Mirza, a former elected representative of the area.
In Honduras, hospitals, which are 50 to 80 years old on average, have fallen into disrepair, with collapsing ceilings, water leaks, damaged walls and rodent infestations, according to a 2022 study by the National Anti-Corruption Council, a nongovernmental organization. The system suffers from shortages of physicians and equipment, as well as strikes by health-care workers. President Xiomara Castro has blamed high debt payments, which she’s called “thunderous and suffocating.”
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In the 1990s, economist Farida Khambata came up with the idea of splitting off the poorest countries from the broader category of emerging markets, which include wealthier nations such as India and Mexico. Growing up in Mumbai in the 1960s, she’d witnessed steep inequalities, sometimes even from one street to the next. After studying economics at the University of Cambridge and doing graduate work at London Business School, Khambata took a post at the World Bank.
At the bank’s International Finance Corp. (IFC), which promotes private-sector investment in developing markets, Khambata maintained the emerging-markets database. To describe the poorest ones, she landed on the term “frontier.” “It was all gut,” she says. “These were countries that were on the edge of becoming emerging markets but not quite there yet. They were on the frontier.”
At the urging of IFC Managing Director David Gill, the bank focused on attracting equity investments to these markets. After a wave of defaults in the 1980s, the idea was that developing markets had borrowed enough already. Equity comes with fewer strings attached—if the investment doesn’t work out, stockholders aren’t owed anything. At first, Wall Street showed little interest.
Khambata recalls pitching the idea of investing in a South Korea-specific stock index and being told it was a charity case. In 1993, a year after the term “frontier markets” was coined, the Korea index had posted a 29% return, according to Bloomberg data. In 2007, Standard & Poor’s launched its Select Frontier Index, made up of 30 stocks of companies in countries such as Pakistan, Panama and the United Arab Emirates. The idea: Give investors access to fast-growing companies and returns that weren’t correlated with other markets.
The early returns of the index reflected their markets’ volatility. It gained 18% in 2007 only to fall 62% the next year, Bloomberg data show. Over the past 10 years, the index has averaged an almost 7% annual return, compared with 12% for the S&P 500. Still, Deutsche Bank, Bank of New York Mellon and BlackRock followed with indexes and exchange-traded funds of their own.
By the 2010s, investors started showing enthusiasm for frontier bonds, reflecting a thirst for higher-yielding securities. The countries might have been poor, but they had low debt-to-GDP ratios, which are a standard measure of a country’s fiscal health. Citigroup’s then-Chief Executive Officer Vikram Pandit and JPMorgan CEO Jamie Dimon both toured Africa in 2010, talking up the opportunities on the continent. “Africa has a major role to play in this new world,” Pandit told reporters in Johannesburg. Dimon said he was “incredibly impressed” by the opportunities on the continent after visiting South Africa with former British Prime Minister Tony Blair, an adviser to the bank.
Later that year, Olusegun Olutoyin Aganga, then Nigeria’s finance minister, led a multicity roadshow in Europe as well as New York to drum up support for the nation’s $500 million eurobond. Buyers from Europe, the US, Asia and Africa bid for part of the deal. By the time it was placed in early 2011, bankers had received orders equaling more than twice the amount of debt sold. The bond yielded 7%, about 3.5 percentage points more than similar Treasuries at the time. “There was a lot of optimism at the time, and for good reason: Seven of the 10 fastest-growing economies were in Africa,” Aganga says.
Over the next decade, African countries borrowed heavily. Debt rose 250%, to $645 billion, according to One, an antipoverty charity founded by U2 singer Bono that’s pushed for relief from repayment. Frontier countries are also in hock to China. The country loaned tens of billions of dollars to African nations, often through bilateral deals or state banks, which offered credit for infrastructure projects.
China is increasingly competing with multilateral lenders, such as the International Monetary Fund, to provide bailouts to distressed countries. As of the end of 2021, China had doled out 128 rescue loans worth $240 billion, according to a study based on statistics from AidData, an institute housed at William & Mary, a public research university in Virginia. That type of lending from China was rare a decade earlier, the study found.
Now, rising interest rates and inflation have exposed risks across frontier markets. Bolivia’s notes have lost more than a third of their value in 2023, while debt from Ecuador have also fallen by double digits. This week, Ethiopia said it would miss an interest payment that was due on Monday because of the nation’s “fragile external position.” Like its peers, the nation had been effectively locked out of markets. In fact, no sub-Saharan African country has issued a eurobond since April 2022, the IMF said in its October outlook.
Some investors, seeing opportunity, are scouring the world for countries where the market is overstating the risk of default. The value of El Salvador’s bonds have more than doubled in 2023. “There is a clear distinction between the ones that find access to markets easier and those that find access to markets harder,” says Philip Fielding, a money manager at MacKay Shields, a unit of New York Life Insurance Co.
These days, Aganga, the former finance minister, has a more sceptical view of owing money to foreign countries. “The global financial system is, Africans would say, biased toward the US,” he says. Aganga recalls, wistfully, the days when Wall Street couldn’t get enough of poor countries’ debt. “Now everything is the reverse,” he says. “Inflation and interest rates are high globally, and frontier markets, especially those in Africa, are suffering.”
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