Developing countries shift away from dollar debts amid rising US rates

A recent Financial Times article examines how several developing countries, including Kenya, Sri Lanka, Panama, and Colombia, are seeking alternatives to dollar-denominated borrowing. With the US Federal Reserve maintaining relatively high interest rates, the cost of servicing dollar debt has risen sharply for emerging markets.

This has encouraged governments to turn to cheaper options, particularly loans in Chinese renminbi and Swiss francs, where interest rates remain near historic lows. The article highlights the financial motivations behind this trend, its connection to China’s Belt and Road Initiative, and the risks of relying on currencies that are not tied to export revenues.

At the heart of the shift is the divergence in global monetary policy. The FT notes that the high level of interest rates and a steep US Treasury yield curve has made USD financing more onerous for developing countries, even with relatively low spreads on emerging market debt, according to Armando Armenta, vice-president for global economic research at AllianceBernstein.

For governments already struggling with fiscal constraints, the additional burden of servicing dollar debt has become unsustainable. Armenta added that many such shifts to cheaper financing are likely “temporary measures” by countries that had to “focus on lowering their financing needs.”

The renminbi has emerged as a particularly relevant alternative, not only because of China’s lower borrowing costs but also due to its strategic push through the Belt and Road Initiative. The article points out that Beijing has lent hundreds of billions of dollars for infrastructure projects to governments across the globe.

While official figures on renminbi lending are scarce, Kenya and Sri Lanka have publicly confirmed efforts to switch major projects away from dollar repayments. In Kenya, the Treasury disclosed in August that it was in talks with China ExIm Bank to convert repayments on a $5 billion railway loan into renminbi. 

Similarly, Sri Lanka’s president told parliament that his government sought renminbi financing to complete a highway project left unfinished after its 2022 default.

The attraction is clear: with the Federal Reserve’s benchmark rate at 4.25 to 4.5 per cent, the outright cost of dollar borrowing is high, while China’s seven-day reverse repo rate stands at just 1.4 per cent.

“It seems that the cost of funding might be the reason for conversion into renminbi,” said Thilina Panduwawala, an economist at Colombo-based Frontier Research.

Yet even as the renminbi gains ground, skepticism remains. Yufan Huang, fellow at the China-Africa Research Initiative at Johns Hopkins University, argued that progress toward wider adoption is limited: “Even now, when renminbi rates are lower, many borrowers remain hesitant. For now, this looks more like a case-by-case operation, as with Kenya.”

Switzerland has also emerged as a source of cheap financing. Panama secured nearly $2.4bn in Swiss franc loans in July as it sought to ease its fiscal deficit and fend off a downgrade to junk status.

Finance minister Felipe Chapman told the FT that the cheaper loans saved the country over $200 million compared with issuing in dollars, adding that hedging strategies helped mitigate exchange-rate risks. He described the approach as a deliberate effort to “diversify” debt management into euros and francs “instead of relying solely on US dollar capital markets.”

Colombia too appears to be testing the waters. In June, its finance ministry signaled an intention to broaden external borrowing beyond the dollar.

According to Andres Pardo of XP Investments, the government could tap Swiss-based rates of 1.5 per cent to refinance dollar debts yielding 7 to 8 per cent, as well as peso bonds paying as much as 12 per cent. Such a move would offer substantial savings, especially after S&P downgraded Colombia’s local currency debt to junk status following a fiscal rule suspension.

Despite the immediate relief these alternatives provide, experts caution that renminbi and Swiss franc markets are far smaller and less liquid than dollar markets. A debt fund manager quoted by the FT said, “They are helpful to underlying fundamentals, if you are cleaning up your maturity profile . . . however, we need to see that policymakers are making improvements to open up [dollar] markets to them again.”

Meanwhile, the corporate sector in emerging markets has been diversifying through euro-denominated bonds.

According to JPMorgan data cited in the article, issuance reached a record $239bn by July, with Asian issuers accounting for a growing share. “This year’s euro issuance is growing more than we see in dollar issuance,” observed Toke Hjortshøj of Impax Asset Management.

By Sabina Mammadli