Emerging and developing economies' debt hits eight-year high in 2018, World Bank says

The debt levels have climbed at the fastest pace in the last 50 years

A Chinese investor uses a laptop as he monitors stock prices at a brokerage house in Beijing, Monday, Nov. 4, 2019. Asian stock markets followed Wall Street higher Monday after unexpectedly strong U.S. jobs data helped to soothe worries American factory activity was weaker than forecast. (AP Photo/Mark Schiefelbein)

The World Bank urged policymakers to act swiftly to address the problem of surging debt in emerging and developing economies that hit an eight-year high in 2018, rising at the fastest pace in five decades.

The wave of debt in these regions swelled to $55 trillion (Dh202tn) last year, the lender said in a study on Thursday.

“The size, speed and breadth of the latest debt wave should concern us all,” said David Malpass, the World Bank group president.

“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.”

The global debt level has risen sharply over the past few years as interest rates fell, encouraging sovereigns and corporate borrowers to capitalise on low borrowing costs.

The World Bank's study came shortly after the International Monetary Fund also sounded the alarm on the higher rate of global debt in 2018. Combined public and private global debt jumped to $188tn at the end of 2018, up by $3tn compared to 2017, according to a new update of the IMF's Global Debt Database released on Tuesday.

The global average debt-to-GDP ratio edged up to 226 per cent, 1.5 percentage points higher year-on-year, while country-by-country data suggested many economies could be ill-prepared for the next downturn.

The World Bank's Global Waves of Debt report took into account the four major episodes of debt accumulation that have occurred in more than 100 countries since 1970.

Developing countries’ debt-to-GDP ratio reached 168 per cent, up 54 per cent, since the debt build-up began in 2010, the report found. That is a rise on average of about 7 percentage points a year.

“Policymakers should act promptly to enhance debt sustainability and reduce exposure to economic shocks,” said Ceyla Pazarbasioglu, World Bank Group’s vice president for equitable growth, finance and institutions.

There is urgency in debt management because "history shows that large debt surges often coincide with financial crises in developing countries, at great cost to the population," Ms Pazarbasioglu said.

Continued low global interest rates "provide no sure protection" against financial crises as borrowing costs could rise sharply or economic growth could slow significantly, the report said.

The latest wave of debt is different from the past because it features a simultaneous build-up in both public and private liabilities, involves new types of creditors and is spread across more regions.

The World Bank emphasised the importance for emerging market and developing economies to further improve their policy frameworks.

“Robust macroeconomic, financial, and structural policies can help countries strike the right balance between the costs and the benefits of debt accumulation,” the report said.

“Such policies are also critical to help reduce the likelihood of financial crises and alleviate their impact, if they erupt.”

Noting there is no magic bullet solution to the current surge in debt, the World Bank outlined a series of policy recommendations, including sound debt management and transparency that will help reduce borrowing costs, enhance fiscal sustainability and contain risks.

In addition, strong monetary, exchange rate and fiscal policy frameworks can safeguard emerging and developing economies’ resilience in a fragile global economic environment, it said.

Robust regulation of the financial sector can also help identify and act on emerging risks, according to the World Bank report.