A few blocks from Ghana’s statehouse in Accra sits a 14.5 acre parcel of prime real estate with a football field-sized hole in the middle of it. What should be emerging from the ground is the frame and sweeping, concave roof of the futuristic 5,000-seat National Cathedral of Ghana. Instead the project has stalled, a victim of an economic crisis in the West African country, which was until recently one of the world’s fastest-growing economies and a magnet for foreign investment.

The cathedral’s original price tag of $100 million has quadrupled amid an economic crisis that has seen record inflation and the cedi, the world’s worst performing currency this year, lose close to 60% of its value — almost double that of Ukraine.

With debt interest payments eating up more than half of government revenues Ghana has asked the IMF for a $3 billion bailout, proposed a debt restructuring that could involve losses of up to 30% for foreign investors and is planning to barter some of the gold it produces for oil. It represents a sharp reversal in fortune from sub-Saharan success story to the harbinger of what awaits several emerging markets that borrowed heavily at a time of low interest rates but now face expensive repayments.

The government in Accra has already spent more than $58 million on the cathedral with nearly half going to the firm of star architect Sir David Adjaye. The project has become one of the most high-profile in a decade-long spending spree by successive Ghanaian governments after debt forgiveness in 2006, the discovery of oil and the issuance of its first eurobond in 2007 helped boost growth.

The country of 31 million people embodies a period when emerging-market borrowing by sovereign nations surged, hitting a record total of $250 billion in 2020, according to Bloomberg data. But its plight is a test case: if a country that until very recently was a darling of lenders is struggling to dig its way out of this crisis, how will other frontier markets fare?

The country’s economic descent has been swift. In February 2020 it raised $3 billion in a debt auction that the government said was five times oversubscribed. A little over a year later it was locked out of international debt markets altogether. Since January, it has repeatedly been downgraded into junk status by rating agencies.

It is not alone. At least 15 of the 72 emerging markets in a Bloomberg index including Ethiopia, Pakistan and Tajikistan  now have dollar debt trading at distressed levels, after Russia's invasion of Ukraine fueled global energy and food price inflation. Central banks have responded by increasing interest rates, which has shrunk the available liquidity for junk-rated nations. At least $80 billion has flowed out of emerging-market debt funds this year.

Although there has been a small rally in the bond market in recent weeks, distressed debt in emerging markets remains a serious weak spot in a global economy preparing for recession. Governments in developing countries need to refinance $215 billion of debt coming due in the next two years. But many can no longer borrow. Among those most exposed to distressed debt are asset managers such as Allianz SE, BlackRock Inc and Fidelity Investments.

“We expect the borrowing conditions for emerging markets to stay difficult and rates to remain high,” said Guillermo Osses, head of emerging-market debt strategies at hedge fund manager Man GLG, which has run the best performing EM fund this year. “Around 15 countries have sovereign bonds trading at distressed levels, and there is no option for them to refinance the current level of debts at these rates. They will have to either go to the IMF, devalue their currencies or restructure the debt.”

Along with dozens of other developing countries Ghana benefited from a debt-relief initiative run by the IMF and World Bank in the early 2000s, which wiped about $4 billion off its debt stock by 2006. That shift from mostly concessional funding before 2007 to largely commercial borrowing afterwards was transformational for Ghana, says Bright Simons, an analyst at the Accra-based think tank Imani Centre for Policy and Education.

“This new source of funding was completely different from what we’d experienced in the past — this money was going directly to the budget like a steroid injection straight into the bloodstream,” said Simons. The cathedral “is the perfect example of the spending spree: Ghana behaving like a fabulously rich sultanate in the Gulf rather than a developing country just attaining frontier market status.”

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