[LONDON] Leaders of the world’s emerging economies are keeping a close eye on Argentina’s newly-elected President Javier Milei and his radical free-market moves.

With the Libertarian outsider set to be sworn in on Dec 10, the big question is whether the 53-year-old’s campaign promises – including ditching the peso for the US dollar and closing the central bank – will be able to revive Argentina’s dysfunctional US$622 billion economy.

Inflation in the impoverished nation soared to 143 per cent in October, the fastest pace since the country was exiting hyperinflation over 30 years ago. The Argentine peso has plunged by around 90 per cent against the US dollar this year.

What’s more, there is some US$22 billion in foreign debt that must be repaid in 2024, a sum that includes interest due to international bondholders and the International Monetary Fund.

Outside of Argentina, the generally more stable countries in Asia, South America, Africa and eastern Europe have so far avoided a similar crisis. Unfortunately, the local and foreign debt of the world’s emerging markets has soared to dangerous levels.

According to the Institute of International Finance (IIF), the estimated size of the total emerging market debt rose by US$6.8 trillion to reach US$101.3 trillion in the 12 months ended September 2023.

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This is almost a third of global debt that reached a record US$307.4 trillion in the third quarter, the financial services trade group said in a report last week.

The debt-to-GDP ratio in emerging markets is also at an all-time high of 255 per cent, roughly 32 percentage points higher than the levels seen in 2018. This was largely driven by Russia, China, Saudi Arabia and Malaysia. Chile, Colombia and Ghana saw the biggest declines in the ratio.

The IIF estimates that global debt will hit US$310 trillion by the end of 2023, an increase of more than 25 per cent in the last five years. It also warned that a greater shift towards political populism could trigger even higher debt levels next year.

The IIF’s managing director Sonja Gibbs said that “a swathe of elections and ongoing geopolitical frictions” raise concerns about further government borrowing and fiscal discipline in the coming 12 months.

Elections are due to take place in more than 50 countries in 2024, including the US, Indonesia, India, South Africa, Turkey, Pakistan, Taiwan and South Korea.

Geopolitical tensions – including the ongoing Ukraine war, the Israel-Hamas conflict, and the still shaky US-China relationship – will have an adverse impact on emerging markets, said Gibbs.

“If upcoming elections lead to populist policies, the result could be more government borrowing and even less fiscal restraint,” she said, adding that budget deficits in the next three years will raise the global government debt stockpile by US$16 billion.

Economists said that high debt levels will crimp the long-term growth of emerging markets.

“In the short term, borrowing can boost activity. But in the longer term, extensive debt is a burden on households,” said Lacy Hunt, the 81-year-old chief economist of US-based Hoisington Investment Management Company.

Over-borrowed businesses, which now need to pay much higher interest to creditors, have less leeway to generate job-creating direct investments in factories and equipment. This will inevitably result in higher unemployment, said Hunt.

“Despite a confluence of unprecedented shocks, emerging markets have been resilient with few signs of an impending crisis,” said Pramol Dhawan, the head of emerging markets portfolio management at asset manager Pimco.

Michael Langham, an emerging markets analyst at UK asset manager abrdn, said: “It’s a mixed picture. Emerging markets have generally done better in tackling inflation than their developed market counterparts.”