A World Bank report published Thursday (pdf) highlights the “striking” surge in debt in emerging markets and developing economies (EMDEs), which report authors call the “largest, fastest and most broad-based in EMDEs in the past 50 years.”
Debt in these countries has hit an all-time high of 168 percent of GDP, or around $55 trillion, driven by extremely low borrowing costs.
Global Waves of Debt, which looked at the four major bouts of debt growth since 1970, found that the debt-to-GDP ratio of EMDEs climbed by 54 percentage points since 2010, which is nearly three times as fast as during the Latin America debt crisis. The report also notes that debt levels in low-income countries, a subset of EMDEs, climbed to 67 percent of GDP ($268 billion) in 2018, up from 48 percent of GDP (around $137 billion) just nine years ago.
“The size, speed and breadth of the latest debt wave should concern us all,” World Bank President David Malpass said in a statement. “Clearly, it’s time for course corrections.”
Will History Repeat Itself?
The report warns that the mammoth wave of debt, in combination with other risk factors, could cause history to repeat itself and “culminate in financial crises in these economies.”
“In addition to their rapid debt buildup, they have accumulated other vulnerabilities, such as growing fiscal and current account deficits and a shift toward a riskier composition of debt,” the study states. “Thus, despite exceptionally low real interest rates, and prospects for continued low rates in the near-term, the current wave of debt accumulation could follow the historical pattern and culminate in financial crises in these economies. ”
The study noted that countries that experienced debt-related crises in past episodes of debt accumulation had a toxic mix of unsustainable macroeconomic policies along with structural and institutional weaknesses.
“Many of these economies had severe weaknesses in their fiscal and monetary policy frameworks, including poor revenue collection, widespread tax evasion, public wage and pension indexing, monetary financing of fiscal deficits, and substantial use of energy and food subsidies,” the authors wrote. “In addition, crisis countries often borrowed in foreign currency and managed their exchange rates, while regulation and supervision of banks and other financial institutions were frequently weak.”
Political uncertainty was another problem hot spot in several emerging market countries that suffered past debt-related crises.
“History shows that large debt surges often coincide with financial crises in developing countries, at great cost to the population,” said Ceyla Pazarbasioglu, the World Bank Group’s Vice President for Equitable Growth, Finance, and Institutions. “Policymakers should act promptly to enhance debt sustainability and reduce exposure to economic shocks.”
A Way Out?
The World Bank head called for improvements to how leaders in affected countries manage debt.
“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,” Malpass said.
Areas for action include improved tax collection and tighter fiscal rules to manage spending, the World Bank said.
“Towering though it may seem, the latest global wave of debt can be managed,” Malpass said in the report. “But leaders need to recognize the danger and move countries into safer territory in terms of the quality and quantity of investment and debt—sooner rather than later.”
While the study authors noted that “there is no magic bullet of a policy prescription” that would prevent the current debt wave from crashing down destructively, they identified four areas for improvement.
These areas are enhanced debt management and transparency; more robust monetary, exchange rate, and fiscal policy frameworks; proactive financial sector regulation and supervision; and effective public finance management, in combination with sound bankruptcy frameworks and policies that promote good corporate governance.
The World Bank noted that while the prescribed policy mix should depend on the specifics of a given country, “the experience of past waves of debt points to the critical role of policy choices in determining the outcomes of these episodes.”