UNCTAD trims global economic growth to 2.6% in 2022: The United Nations Conference on Trade and Development (UNCTAD) has revised downward its global economic growth forecast for 2022 to 2.6%, down from 3.6%, due to the war in Ukraine and the changes countries are making to their macroeconomic policies as a result, according to its updated report (pdf). Developed countries are expected to “reinforce” monetary tightening in light of the war, with significant slowdowns in growth expected in parts of Western Europe and Central, South and Southeast Asia.

Developing countries to bear the brunt of the damage: Developing countries face the threat of a “combination of weakening global demand, insufficient policy coordination at the international level and elevated debt levels from the pandemic” that could push them into a “downward spiral of insolvency, recession and arrested development,” UNCTAD wrote.

External debt has been exploding over the past decade: External debt in developing countries almost doubled from USD 6.5 tn to USD 11.7 tn between 2011 and 2020 which accounts for a rise from 41 to 69.5 percent of GDP. These countries are projected to require USD 310 bn to meet external public debt service requirements in 2022 but their ability to service their debt “deteriorated during the first year of the pandemic,” the report said. The external debt-to-export ratio increased in 121 out of 127 developing countries between 2019 and 2020, while 51 countries stood above 250% in 2020.

Egypt name-checked as potentially exposed to growth slowdown: Countries like Egypt, Pakistan, Mongolia, Sri Lanka, and Angola that face “large rollover pressures and a large debt service to export ratio” could face a downward pressure on their growth rates, UNCTAD says. The government had been planning to bring down our debt service bill to 30% of total state expenditure next fiscal year, compared to 31.5% penciled in for FY2021-2022. Our debt-to-GDP ratio was also set to fall below 90% in FY2022-2023.

Could the government revise our debt targets? With revisions made to the budget, including trimmed GDP growth and a narrowed primary surplus, the government could announce changes to its debt targets on the back of the implications of war.

The policy response is no easy feat, with limited maneuverability: Balance of payments constraints and macroeconomic tightening in richer countries are making policy responses even more difficult to maneuver. While “deepening financial integration widens the socio-economic scope of the impact from the dynamics of the global financial cycle,” the report says.

Developing countries are banking on interest rate hikes to facilitate higher financial returns than in richer economies. “Policy makers in developing economies will be placed under pressure to tighten domestic policy in an attempt to prevent capital outflow,” the report says. That’s the case in Egypt, where the Central Bank of Egypt enacted a surprise 100 bps interest rate hike last month to contain inflation. State-owned Banque Misr and the National Bank of Egypt followed up by offering high-yielding 18% certificates of deposit, which have attracted some EGP 423 bn of savings from Egyptians as of Tuesday.

Interest rate hikes in richer countries affect monetary policy elsewhere: As rich countries raise interest rates to combat inflation,” (read: The Fed’s expected 250 bps-worth of hikes this year) people in the developing world will be forced to take on a disproportionate share of the adjustment to the post-pandemic global economy,” the report says. What developing countries need is “a financial system that enables developing countries to invest for the long term, to introduce the changes needed to mitigate the enormous costs of climate change,” according to the report.