Rising oil prices and developing country debt – the next shock is already here

By Rebecca Ray, Kevin P. Gallagher and Marina Zucker-Marques

Once again, developing countries are experiencing shockwaves from a crisis they did not create. Since the US-Israel strikes on Iran began on February 28, global oil prices have skyrocketed, with consequences rippling far beyond the Middle East, impacting sovereign bond spreads across developing and emerging markets in the Global South.

In just three weeks, the impact has been dramatic. In the most extreme cases, Ukraine has seen its borrowing costs rise by 135 basis points while Gabon has seen its costs fall by 151 basis points in just two weeks.

Figure 1. Bond spread changes, February 27 – March 20, 2026, selected developing countries (basis points)

In large part, these swings are related to countries’ petroleum trade balances. Countries that are net petroleum importers have suffered, while net exporters have benefited (Figure 2). The shift in bond spreads has been particularly stark for low-income and lower-middle-income fossil fuel importers that were already vulnerable, such as Sri Lanka and Pakistan, who have current IMF agreements.

Figure 2: Developing country petroleum trade balances and bond spread changes, February 27 – March 20

Note: Figure includes most recent data for crude and refined petroleum products (SITC codes 333 and 334). Figure omits Iran and Iraq (whose bond yields have shifted due in part to military activity); and Ethiopia, Lebanon, Mozambique, Senegal and Venezuela (who are already in default or partial default or whose spreads already exceeded 1,000). . **: statistically significant at the 99% level. Source: Author calculations using United Nations COMTRADE and J. P. Morgan EMBI data.

Impact on Debt Sustainability

For many countries, this timing couldn’t be worse. Bond spread shocks pose particular risk for governments with major external sovereign debt payments due in 2026. These challenges will hurt their ability to find new financing at a time when existing debts are coming due.

After COVID-19, when international borrowing became more difficult, many countries – particularly in Africa — increased their exposure to local currency debt. While this reduces risks in foreign exchange rate swings, it comes at a higher cost than hard-currency debt.

To make matters worse, this picture understates the problem, as available data almost certainly underestimates these findings, as it excludes domestic government debt payments and does not measure bond yield spread for every country.

Figure 3: Developing country debt service payments for 2026 and bond spread changes, February 27 – March 20

Note: Figure omits Iran and Iraq (whose bond yields have shifted due in part to military activity); and Ethiopia, Lebanon, Mozambique, Senegal and Venezuela (who are already in default or partial default or whose spreads already exceeded 1,000). Graph reference lines indicate zero bond spread change and median external payments on public and publicly guaranteed (PPG) debt for 2026 (10.0% of government spending). Source: Author calculation using World Bank International Debt Statistics and J.P. Morgan EMBI data.

Across Africa, Asia, and Latin America, seven countries face a double challenge. Twelve countries are experiencing both rising bond spreads and above-median debt payments due in 2026: Cote d’Ivoire, Dominican Republic, Egypt, El Salvador, Ghana, Honduras, Jordan, Kenya, Mongolia, Paraguay, Rwanda and Uzbekistan.

In countries with significant fuel subsidies, these pressures are intensified, as higher oil prices drive up government spending. Uzbekistan, Egypt and Mongolia all have higher subsidies on fossil fuels, which amounted to 28.3%, 28.0% and 11.9% of government spending, respectively. These governments face a triple stress of rising subsidy burdens, above-median debt payments coming due and rising costs of new finance that they might seek.

As Figure 4 shows, these 12 countries are expected to pay their largest debt payments to four main categories of creditors in 2026: China, Paris Club, multilateral creditors, and bondholders. Again, these contexts are almost certainly an undercount due to incomplete data coverage for many other countries.

Figure 4: Debt service scheduled for 2026 by largest creditor categories, selected developing countries

Note: Debt service to the IMF includes repurchases and charges. Source: Author calculations using World Bank International Debt Statistics. Figure omits Iran and Iraq, whose bond yields have shifted due in part to military activity; omits Lebanon, Mozambique, Senegal and Venezuela, whose spreads already exceeded 1,000; and Ethiopia, in partial default.

What Creditors Can Do About It, Before It’s Too Late

The good news is that this is not an unsolvable problem. But requires swift and coordinated action. Most of these seven countries will primarily owe their debt payments to multilateral creditors and the IMF in 2026, and fortunately, these institutions do have tools to address such a situation.

First, since the fuel crisis will become a food crisis as well, the IMF can revive its Food Shock Window from the last crisis in 2022 and increase unconditional lending.

Second, bilateral creditors in the G20 can speed up existing restructuring processes to prevent more countries from falling into default. For G20 creditors with current low interest rates, like China, rescheduling now can save debtors hundreds of millions of dollars per year.

Finally, there is a need to revisit how debt relief is addressed. Now is a critical time to revisit the idea of “fair comparability of treatment,” which can facilitate multilateral creditors’ participation in debt relief by incorporating recognition of the below-market rates they initially charged on the debt coming due.

This is not only about markets or oil prices, but whether the international system can respond in time to avoid deepening already existing debt vulnerabilities. Each of these creditors has the ability to act to prevent a new wave of defaults as pressure mounts across the Global South.