Resilience of some emerging nations won’t last: G20 finance chief

Emerging and developing nations face a "hurricane" of risks from rising energy costs and food insecurity, and any resilience some countries may have won't last long, the chair of the Group of 20 finance ministers' forum has told Bloomberg. 

The comment came from Sri Mulyani Indrawati who remained World Bank's No 2 official for more than five years before returning to Jakarta in 2016 to serve as Indonesia's finance minister.

Despite the inflation whirlwind stoked by the Ukraine war, many emerging economies are stronger and more resilient than they were during past crises in 1997 and 2008, based upon stronger regulation, flexible exchange rates, a deeper market for debt denominated in local currency.

Yet there would be huge pressure on emerging world balance sheets to cater for adequate energy supplies and food security, amid the US central bank's record interest rate hikes to tame inflation for Americans.

Among others, countries like Indonesia, India, Vietnam and Russia are faring much better now than even many of their developed peers but the outlook is fast darkening.

The "hurricane for developing countries is definitely very strong," Indrawati said in an interview with Bloomberg News in Washington. 

These difficulties – coupled with inflation, dollar strength and interest-rate increases – "will put many emerging and developing countries in a very serious, difficult situation."

With the Federal Reserve undertaking the most aggressive rate-hike campaign in a generation to ensure its credibility and tackle inflation, "the consequence is not good for emerging and developing countries" and will make it more difficult for them to issue bonds, Indrawati said.

About 15 developing nations have dollar-denominated government bonds that pay at least 1,000 basis points more than US Treasuries, which is above the threshold for debt to be considered distressed, according to data compiled by Bloomberg. That's double the number of countries from the start of the year.

Indrawati was in the US capital for the annual meetings of the International Monetary Fund and World Bank. On Wednesday, she'll chair the fourth meeting of G20 finance ministers and central bankers this year, and the first since a gathering in Bali in July, after officials from the US, Canada and several European nations walked out on a summit in April as a Russian representative began to speak. 

While some economies are showing resilience, that won't last for long, and more nations will probably need to turn to the IMF for bailouts, Indrawati said. The fund last month approved the creation of a "food-shock window" of emergency financing to help meet countries' needs. 

Indrawati said she expects 2023 will be a "very, very difficult" for many economies, a vision that she shared in meetings with bond investors in New York and Boston in recent days. Countries that today can't get fertilizer will be facing food shortages in six months, just as winter a year from now is actually likely to be harsher than the coming winter in terms of rising energy prices.

Against that difficult backdrop, Indrawati highlighted the importance of Indonesia hosting the G20 and continuing to include Russia. The advantage of the G20 versus the Group of Seven, a smaller forum of rich countries, is that it has the breadth to decide global problems, she said.

Removing any nation would risk a fragmentation of the global economy that would increase the difficulty in solving the world's most pressing problems like climate change, boosting financial inclusion or reaching agreement on debt relief for poor nations, she said.

"The true asset and the true value of the G20 is, regardless of what is happening today, the world will need this kind of cooperation, and this premiere economic forum like the G20 is worth continuing, maintaining and preserving," she said.