Developing countries move out of US$ debts

Interest payments on developing countries loans have in some cases exceeded 10% of revenues. This surge in public debt servicing costs is alarming, limiting budgets in these countries. In 2023, a historic 54 developing nations, with almost half in Africa, dedicated a minimum of 10% of government funds to debt interest payments. See graphic from IMF

With this is mind some developing countries are looking to reduce this burden. The FT published an article on developing countries turning to currencies with low interest rates which include the Swiss franc (CHF) and the Chinese renminbi (RMB). The high relative interest rates in the US has made US dollar financing more difficult for developing countries which include Kenya, Sri Lanka and Panama. The RMB is now at the highest level for this year, which is not only a consequence of moving out of USD debt but also the belt and road initiative in which the Chinese have lent billions of USD for infrastructure projects to governments across the globe.

• Kenya is switching to RMB repayments on USD loans for a $5bn railway project.

• Sri Lanka was seeking lending in RMB to complete a highway project which was out on hold when the country defaulted in 2022.

By borrowing in RMB and CHF countries can access debt at much lower interest rates than those offered by USD bonds. See rates below: Swiss National Banks – 0% China’s benchmark 7 day reverse repo rate – 1.4%. The US Fed Funds rate – 4.25 – 4.50%.

Many developing countries have faced large exchange rate losses because their debt is in USD, but their revenues (taxes, exports) are in local currency. When the USD strengthens, their debt burden effectively rises, putting pressure on government finances. By borrowing in RMB or CHF they spread their currency risk across multiple currencies rather than being overexposed to the USD. Though not a major trade currency, the CHF is extremely stable and carries a reputation for low volatility—useful for governments wanting predictable debt obligations.

Geopolitical motives Some countries also want to limit exposure to U.S. monetary policy and the risk of sanctions. The BRICS group (Brazil, Russia, India, China, South Africa) and others have been actively promoting alternatives to dollar dominance in global finance.

Source: Developing countries swap out of dollar debt to cut borrowing costs. FT – 2-9-25

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