The path to recovery in these countries will be fraught with challenges as they navigate a complex landscape of rising borrowing costs, weaker external demand, and volatile exchange rates.

With these vulnerabilities in mind, experts are urging international financial institutions and governments to focus on addressing these risks through coordinated action and structural reforms, according to the report. It added that strengthening fiscal frameworks, improving debt management, and fostering more resilient economic structures will be crucial to ensuring the long-term stability and growth of LMICs.

The global financial landscape for the LMICs showed significant shifts in 2022, with growing concern over external debt burdens, declining capital inflows, and an uncertain macroeconomic environment.

External debt stock decline in 2022
 

For the first time since 2015, the external debt stock of LMICs fell in 2022, decreasing by 3.4 percent, from $9.3 trillion in 2021 to $9 trillion. Two main factors caused this decline: negative debt flows, where loan disbursements fell short of principal repayments, and the appreciation of the US dollar against other major currencies, which impacted debt denominated in those currencies. Long-term and short-term debt stocks saw similar declines, with the decrease in long-term debt primarily attributed to a five percent reduction in obligations to private creditors.

Egypt standing
 

The report showed that Egypt’s overall debt reached its highest since 2012, recording $163.1 billion, with the long-term debt accounting for the lion's share of this amount with $111.1 billion.

The data also indicated that 37 percent of Egypt’s debt in 2022 was secured from multilateral institutions, including the International Monetary Fund (IMF) (14 percent), the World Bank (nine percent), and other institutions (14 percent). Meanwhile, the gulf countries' deposits at the Central Bank of Egypt (CBE) acquire 27 percent of Egypt’s overall debt, with five percent being acquired by Saudi Arabia, UAE, and Kuwait for each and 12 percent by other bilateral parties.

Negative debt flows and rising outflows
 

In a significant shift, the total net debt flows to LMICs turned negative in 2022, resulting in outflows of $185 billion, starkly contrasting the $556 billion inflows recorded in 2021. Short- and long-term debt flows saw declines, with long-term debt flows reaching a record low and turning negative for the first time since the early 2000s. The outflow was mainly driven by a $189 billion reduction in inflows from private creditors, as sovereign bond issuances and lending from commercial banks sharply declined due to tightening monetary policies in advanced economies. The rising borrowing costs, driven by inflation control measures, led to a decreased appetite for debt in LMICs, contributing to net outflows of $127.1 billion to bondholders in 2022.

Impact of rising borrowing costs and inflation

Monetary tightening, mainly in high-income economies, continues to impact LMICs, making borrowing more expensive and increasing the financial vulnerability of these nations. Elevated inflation and higher interest rates have weakened external demand and led to tighter economic conditions, exacerbating the fiscal challenges for many LMICs. The increase in borrowing costs has left one-fourth of LMICs with sovereign spreads exceeding 10 percent, marking a potential loss of market access and a higher risk of default.

By the end of 2024, economic activity in LMICs is projected to be below pre-pandemic projections at five percent. In about one-third of these countries, per capita income in 2024 will still fall below the 2019 level, and growth over the 2020-2024 period is expected to be the weakest non-overlapping five-year average since the mid-1990s.

New loan commitments plunge
 

In 2022, new external loan commitments to LMICs sharply declined, recording the most significant drop in a decade. The commitments to public and publicly guaranteed sector entities fell by 23 percent to $372 billion. Private creditors' contributions were the main driver of this decrease, dropping 33 percent to $218 billion. Moreover, bond issuance by LMICs dropped by 51 percent to $114 billion, with China — the largest bond issuer — recording a 74 percent decline in new bond issuances.

Multilateral lenders step in
 

While commitments from private creditors have dropped, multilateral lenders, such as the World Bank, have stepped in to offset the decline partially. New commitments from multilateral creditors rose 1.5 percent in 2022 to $115.6 billion, with the World Bank increasing its disbursements by 1.3 percent to $53.5 billion, which accounted for nearly half of the total new commitments from all multilateral institutions.

Debt service reaches historic highs
 

Debt service payments by LMICs reached a historic high of $443.5 billion in 2022 and are projected to continue rising in the coming years. This increase in debt servicing obligations comes when many countries are grappling with rising interest rates and unfavourable exchange rate movements, adding to the fiscal burden of external debt payments. In 2023-2024, debt service on public and publicly guaranteed external debt is expected to rise by 10 percent.

Potential risks to future growth
 

The risks to the global economic outlook for LMICs are tilted to the downside, with several factors contributing to a challenging environment. Elevated geopolitical tensions, rising inflation, and tightening monetary policies in advanced economies are likely to depress economic activity in these countries further. Potential disruptions to commodity markets and trade and increased borrowing costs could destabilize financial conditions further.

Moreover, long-term growth prospects for LMICs are weakening, with key growth drivers softening in recent decades. Global trade fragmentation and climate change-related events add further uncertainty. However, according to analysts, if structural reforms are implemented to enhance growth, improve governance, and mitigate climate impacts, LMICs may be able to offset some of the adverse effects and stabilize their economies.