Unprecedented debt levels among developing nations could overwhelm many emerging markets if the global economy takes a downward turn according to statements issued by the World Bank yesterday.
Amid sluggish growth in many countries, debt has grown more in this cycle of expansion than any other in the last 50 years. The eight year surge in debt has pushed borrowing among emerging market and developing economies (EMDEs) to a record $55tn last year, indicating significant levels of exposure for both private and public sectors.
The analysis in Global Waves of Debt, a study of the four significant episodes of debt accumulation since 1970, found the debt-to-GDP ratio of developing countries had climbed 54 percentage points to 168% since the debt buildup began in 2010.
The total includes all forms of debt – consumer, business and government – and illustrates the pressure on all parts of the economy to honour debt payments, mostly to banks and international investment funds. On average, the debt-to-GDP ratio of the 100 countries affected increased by seven percentage points each year – nearly three times as fast as it did during the Latin America debt crisis of the 1980s.
Ceyla Pazarbaşioğlu, the World Bank’s vice-president for equitable growth, finance and institutions, said: “History shows that large debt surges often coincide with financial crises in developing countries, at great cost to the population.
“Policymakers should act promptly to enhance debt sustainability and reduce exposure to economic shocks.” According to the report, the widespread adoption of historically low interest rates since 2008 by central banks to tackle low inflation has mitigated the risk of a crisis “for now”.
But the report argued the record of the past 50 years highlighted the dangers of presuming interest rates and inflation would remain low. “Since 1970, about half of the 521 national episodes of rapid debt growth in developing countries have been accompanied by financial crises that significantly weakened per-capita income and investment,” it said.
World Bank executives have previously argued that low-income countries should borrow on international money markets to fund investment and infrastructure spending. But since a fall in commodity prices in 2015, many countries have used borrowing to fund welfare payments, education, health costs and disaster relief.
The World Bank Group’s president, David Malpass, said: “The size, speed and breadth of the latest debt wave should concern us all. “It underscores why debt management and transparency need to be top priorities for policymakers, so they can increase growth and investment and ensure that the debt they take on contributes to better development outcomes for the people.”