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Info Service on UN Sustainable Development (Jun26/04) Penang, 18 Jun (Kanaga Raja) -- The ability of developing countries to mobilize affordable financial flows in sufficient quantity to support their development goals remains a key problem at the heart of development finance, according to UN Trade and Development (UNCTAD). In a new report, UNCTAD said that a series of global crises, coupled with existing structural weaknesses and inequities in the global financial architecture have meant that the scale of capital available to developing countries from external sources has been insufficient and that what has been accessed has often been too costly. These conditions have also contributed to high levels of volatility in external financial flows and made it harder for countries to pursue sustainable development, it added. Despite some easing in financial markets during 2025, borrowing conditions are still heavily affected by recent shocks, said UNCTAD. Developing countries continue to pay a significant borrowing premium compared to developed countries, and short maturities, elevated coupon rates and debt contracted at higher rates will continue to strain public finances going forward, it cautioned. Furthermore, it said that external financial flows remain too costly, too volatile and too limited to support the investment that developing countries need to achieve the Sustainable Development Goals (SDGs). Developing countries received almost $1.5 trillion in new external financial inflows in 2024, with about half coming through equity-based investment flows and half through borrowing. While domestic financing is larger, at around $11.9 trillion, external financing has an outsized influence on the terms and conditions of domestic finance, it said. Together, financing still remains far below what is needed to achieve the SDGs, with an annual financing gap estimated at around $4.3 trillion. Closing that gap would require both domestic and external financing to increase by about one-third from 2024 levels, requiring around $230 billion each of additional debt and equity financing each year, said UNCTAD. Significantly, the report found that rising debt-servicing costs are putting increasing pressure on public finances. It identified the inability to access affordable, long-term capital and a loss of fiscal space as key contributors to the failure of many developing countries to invest sufficiently in their sustainable development agendas. It said that between 2018 and 2024, 99 developing countries - home to 5.5 billion people in 2024 - experienced a decrease in the share of government revenue available to spend on other things, including the SDGs, due to rising public sector interest costs. "Against this backdrop, it is not surprising then that progress towards the SDGs remains too slow, with only 35 per cent of SDG targets on track or making moderate progress, 17 per cent stagnating and 18 per cent in reverse." FINANCING GAP Assessing the scale and composition of external financial inflows to developing countries, the report said that in 2024, non-resident financial flows to developing countries totalled close to $1.5 trillion, which was split almost equally between equity and debt instruments. It said $722 billion was in the form of equity instruments, $713 billion was debt-related flows and $50 billion comprised external transfer payments from other governments. According to the World Bank data, gross capital formation by developing countries was around $13.4 trillion - suggesting new financing from domestic sources of around $11.9 trillion. However, the report said that a significant and growing financing gap - estimated at around $4.3 trillion per year - exists between the domestic and external financing resources that developing countries can access, and what they need to finance the investments required to achieve their SDG targets. The financing gap suggests that developing countries collectively need to be investing closer to $17.7 trillion annually (current annual spending of $13.4 trillion plus the $4.3 trillion gap) between now and 2030 if they wish to achieve their SDG targets, it stressed. It said that if this gap is apportioned to external and domestic sources in proportion to the scale of their flows in 2024, it would require an increase in new external financial flows to developing countries of about $476 billion per year. Within this total, around $230 billion would need to be additional equity flows, $230 billion additional debt flows, and $16 billion additional bilateral transfers. It would also require the mobilization of additional domestic financial resources of around $3.8 trillion a year. To close the financing gap, both external and domestic sources of finance will need to increase by close to a third on their respective 2024 levels, the report underlined. Developed countries received the equivalent of 38 per cent of the financing required from non-resident external sources, while developing countries only received 11 per cent, it said. "All developing country groupings received significantly less of their financing for gross capital formation from non-resident external sources in 2024 than they did in 2014, and while developed countries also experienced a reduction, it was less pronounced." Although the reduced contribution of external finance could be perceived as a sign of greater self-reliance and enhanced resilience, the fact that it was accompanied by a decline in non-resident inflows and stalled progress in meeting most SDG targets highlights the negative impact of this trend on sustainable development, UNCTAD said. While gross capital formation in developing countries increased by 45 per cent between 2014 and 2024, and domestic financing rose by 60 per cent, new external inflows from non-residents decreased by 18 per cent over the same period. External non-resident flows are subject to significant volatility, due primarily to the swings in portfolio and other investment flows, with debt being the dominant instrument in these two functional categories. The report said this volatility in external flows is highly synchronized with the global economic cycle and creates specific challenges for developing countries that exacerbate exchange rate volatility, amplify the countercyclical nature of debt servicing costs and necessitate domestic monetary and fiscal policy responses that tend to limit economic growth. Looking at the scale of average annual financial inflows into different developing country groups between 2014 and 2024, the report said regionally, while Africa accounts for 38 per cent of the number of developing countries and 22 per cent of the developing world's population, it only received one-tenth of the total flows to developing countries. By contrast, Asia and the Pacific - accounting for a similar share of countries and two-thirds of the population - attracted more than 70 per cent of inflows. Latin America and the Caribbean, with 24 per cent of developing countries and 10 per cent of the developing world's population, received less than a fifth of inflows. The report said developed countries received a significantly higher share of their inflows as portfolio investment than developing countries, but this picture was reversed in relation to direct investment. "The aggregation of annual inflows of investments, plus any valuation adjustments, less any withdrawals or disinvestments, gives rise to a stock of external liabilities, which can be expressed in terms of their functional categories, or their associated type of financial instrument," the report explained. For developing countries, this stock was valued at $30.7 trillion in 2024, with 52 per cent comprised of direct investment, 21 per cent of portfolio investment and the remaining 27 per cent of other investment. In instrument terms, 56 per cent was in the form of equity and 44 per cent was debt. The servicing of these stocks through the payment of profits, royalties and interest gives rise to outflows or debits in the primary income account. The report said in 2024, the total investment returns received by non-residents on their investments in developing countries amounted to $1,070 billion, of which 64 per cent consisted of profit and royalty returns on equity and the remaining 36 per cent was interest on debt instruments. The report said that the costs of servicing the different functional categories of foreign liabilities (the primary income outflows or debits) relative to their corresponding stock values reflect both the average costs paid by the recipient countries on their external liabilities and the average returns earned by non-resident investors on their investments in developing countries. With regards to direct investment, the median costs of developed and developing countries converged in the post-COVID-19 period but were still - on average - 1.5 percentage points higher in developing countries between 2014 and 2024, it noted. In 2024, 24 developing countries were paying average returns of more than 10 per cent, 10 countries were paying more than 20 per cent and 4 countries were paying more than 33 per cent, suggesting high degrees of perceived risk, the report pointed out. Between 2014 and 2024, the median costs of servicing non-resident portfolio investment in developing countries were more than double those of developed countries - averaging 5.2 per cent a year, compared with 2.5 per cent a year in developed countries. The report said the median cost of servicing other investment - which is comprised largely of loan instruments and trade credits - converged in 2023 but began to diverge again in 2024 as interest costs rose more sharply in developing countries. However, despite the concessional nature of much bilateral and multilateral lending to developing countries, these costs were - on average - still 0.6 percentage points higher than in developed countries between 2014 and 2024 and were also significantly more dispersed around the median. The report said this dispersion reflects the fact that most ODEs have relatively greater access to concessional loans from bilateral and multilateral creditors, while FMEs and EMEs are largely forced to borrow at market rates. [According to UNCTAD, frontier market economies (FMEs) are mainly low- or lower-middle income developing countries that integrated into the global capital market after the Global Financial Crisis of 2008, and emerging market economies (EMEs) are mostly upper-middle income developing countries that integrated into the international capital market in the 1990s and early 2000s. Other developing economies (ODEs) are developing countries that are neither EMEs nor FMEs and tend to have low degrees of integration into international capital markets and rely mainly on external public financing from official sources.] HIGH INTEREST COSTS The report also said interest costs have been growing much faster than repayment capacity in developing countries, signalling a deterioration in their public sector debt sustainability and putting a squeeze on the financial resources available to pursue development agendas. Between 2014 and 2024, interest payments on public debt in developing countries increased 2.6 times faster than government revenues, indicating a deterioration in public sector debt sustainability. The need to devote an increasing share of government revenues to interest payments reduces fiscal space and crowds out other public spending, including that required to achieve the SDG targets, it added. Seventy-three per cent of developing countries experienced a decline in fiscal space between 2018 and 2024, meaning they could allocate less finances than before to their developmental priorities. A counter-factual experiment reveals that if 94 developing countries could borrow at the same rates as developed countries, they would collectively save around $500 billion per year in interest payments. Each year, these savings could finance the construction of around 375,000 schools, or 1.3 million primary health clinics, or over 65,000 kilometres of dual carriage highways in rural areas. They could also cover the costs of feeding around 1.6 billion children a minimum dietary diversity diet, or fund over 920 gigawatts of installed solar capacity in these countries. DEBT FINANCING External debt financing takes place through both debt securities and loans. While international bond markets have become increasingly important for EMEs, loans from multilateral and bilateral lenders remain the primary source for many FMEs and ODEs, the report observed. Overall, loans remain the most important source of external debt financing for developing countries, particularly those provided by multilateral lenders. In 2024, 57 per cent of outstanding public and publicly guaranteed (PPG) debt was in the form of loans, while the remaining 43 per cent was owed to international bondholders, it said. "Debt securities have become an increasingly important source of external financing for developing countries, with their share of external PPG debt almost doubling since 2000." Although non-resident creditors have expanded their holdings of local-currency bonds, external bond financing in many developing countries remains largely foreign-currency denominated, the report noted. It said following the Global Financial Crisis of 2008, many developing countries expanded their participation in international markets, taking advantage of a low global interest rate environment and strong investor appetite for higher-yielding assets. During this period, the share of bonds in external debt financing rose by nearly half, accounting for almost 50 per cent of external PPG debt in 2021. Foreign currency issuance - denominated in US dollars, euros and Japanese yen - reached its temporary peak in 2020, when developing countries issued fixed coupon sovereign bonds worth $160 billion. However, the report said after a series of successive shocks, including the COVID-19 pandemic and a global monetary tightening, capital inflows fell and financing conditions deteriorated, leading to a sharp decline in bond issuance. In 2024, external issuance started to regain momentum and in 2025, developing countries issued a record amount of fixed coupon bonds worth $164 billion. Although financial integration has been progressing in recent decades, not all developing countries enjoy equal access to international financial markets, UNCTAD noted. Since 1990, around half of the developing countries analysed issued at least one fixed coupon bond denominated in dollars, euros, or yen. Out of these, the bulk of issuance was in EMEs, that have been integrated into international financial markets for longer and more extensively. Since 1990, EMEs have accounted for 87 per cent of sovereign bond issuances by value. By contrast, FMEs largely entered capital markets following the Global Financial Crisis and accounted for only around 12 per cent of issuance volume. It said ODEs, on the other hand, are countries with extremely limited, or no access to international bond markets, relying mostly on loans for external financing. As a result, ODEs accounted for less than 1 per cent of the total issuance volumes of developing countries since 1990. Issuance is also highly unequal across regions, with most developing countries' foreign currency bonds having been issued in Asia and the Pacific and in Latin America and the Caribbean. Only 14 per cent of issuances originated in Africa since 1990, accounting for just 11 per cent of total issuance value. Out of 54 African countries, only 17 tapped into international bond markets over the past decade. Furthermore, the report said the prices at which developing countries can borrow - as indicated by secondary market yields - reflect the evolving cost of debt in international bond markets. Starting in 2010, increasing investor risk appetite and low global interest rates generated large-scale portfolio inflows into developing countries, lowering average yields, and dampening market volatility. Between 2015 and 2020, average yields in developing countries stood at around 5 per cent. These conditions enabled many developing countries to issue foreign currency bonds at relatively favourable rates, albeit still higher than in developed markets, it noted. It said that following the COVID-19 pandemic shock and the subsequent global monetary tightening, yields in developing countries surged to an average of 6.8 per cent between 2022 and 2024, as capital flows receded and global investors' risk appetite waned. The increase in borrowing costs was especially dramatic for FMEs and African countries, where average yields nearly doubled to 12 per cent and 11 per cent, respectively. Following this deterioration of market conditions, new bond issuance reached a five-year low, falling by nearly 75 per cent in Africa and in FMEs. Borrowing conditions improved in 2024 and 2025, with average yields in developing countries declining from their peak of 7.3 per cent in 2023 to 5.7 per cent in 2025. Fuelled by a loosening of monetary policy stances from the Federal Reserve and the European Central Bank as well as concerns over fiscal sustainability and heightened policy uncertainty in developed economies, investors started returning to developing country assets. Despite this, however, average yields remain elevated and above their pre-2020 levels. This creates challenges for refinancing, as many bonds issued before the pandemic - when global interest rates were exceptionally low - begin to approach maturity and need to be rolled over, said the report. "Although borrowing conditions improved, coupon rates on new bond issues remained high in 2025. Coupon rates, the contractual interest rates set at issuance, do not adjust after issuance and therefore lock countries into long-term financing costs determined at a specific moment in time." Between 2015 and 2025, foreign currency fixed coupon bonds issued by developing countries carried an average rate of 5.2 per cent, almost double compared to the average coupon rate on long-term United States Treasuries of 2.9 per cent. Notably, the report said borrowing conditions depend not only on interest rates but also on the maturity of debt contracts. It said over the past decade, the maturity profile of developing-country bond issuances has shortened markedly. Bonds issued between 2015 and 2021 carried an average maturity of around 17 years, whereas by 2025 the average maturity of foreign currency bonds had fallen to just 9.5 years. The analysis above shows that despite some improvement in borrowing conditions in bond markets, existing challenges persist, with yields and coupon rates on new issuances still elevated, and maturities remaining short, the report summarized. "Large upcoming repayment obligations are creating refinancing pressures, increasing strain on already tight public finances and crowding out development spending. With yields still high, opportunities for cost-reducing refinancing remain limited, as borrowing costs generally exceed those at original issuance." Although debt securities are an important source of external debt financing, many developing countries continue to rely on loans from multilateral, bilateral, and private lenders as their main source of external finance. The report said in 2024, developing countries paid record interest rates of about 4.9 per cent on external loans, more than doubling since 2022, reflecting the severe impact of global monetary tightening. Overall, loans remain a vital source of external financing for many developing countries, particularly for those without access to international financial markets. Rising global interest rates have led to sharp increases in the cost of newly contracted loans, and even multilateral lenders have raised their rates substantially. Despite this, multilateral lenders continue to play a crucial role by providing stable, predictable, and long-term financing, it added. "Although global policy rates have declined over the past years, the loans contracted at higher rates during the tightening phase will place a strain on the fiscal space of developing countries going forward." Ensuring sustained access to affordable long-term financing therefore remains critical, not only to safeguard debt sustainability, but also to prevent interest payments from crowding out essential development spending, it said. +
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