World Bank said growth in developing East Asian and Pacific economies is expected to slow from 6.3 percent in 2018 to 5.8 percent in 2019 and to 5.7 and 5.6 percent in 2020 and 2021, respectively - Photo by World Bank

JAKARTA (TheInsiderStories) – The World Bank has warned against a fast-rising wave of debts in emerging and developing countries now standing at US$55 trillion, according to a new World Bank Group study released on Wednesday (12/18) that urges policymakers to act promptly to strengthen their economic policies and make them less vulnerable to financial shocks.

In a new analysis titled Global Waves of Debt, the Bank concluded that private and public debts in emerging and developing economies (EMDEs) by the end of 2018, marked an eight-year surge that has been the largest, fastest, and most broad-based in nearly five decades.

While the net debt flows (gross disbursements minus principal payments) from external creditors tumbled 28 percent to $529 billion. Although on average the external debt burden of low- and middle-income countries was moderate, several countries have been on a deteriorating debt trajectory since 2009, the report indicates.

So, the study urged policymakers to act promptly to strengthen their economic policies and make them less vulnerable to financial shocks. The share of low- and middle-income countries with debt-to-GNI ratios below 30 percent has shrunk to 25 percent, down from 42 percent ten years ago. Similarly, the share of countries with high debt-to-export ratios has climbed, it stated.

Global Waves of Debt is a comprehensive study of the four major episodes of debt accumulation that have occurred in more than 100 countries since 1970. It found that the debt-to-GDP ratio of developing countries has climbed 54 percentage points to 168 percent since the debt buildup began in 2010.

On average, that ratio has risen by about seven percentage points a year—nearly three times as fast it did during the Latin America debt crisis of the 1970s. The increase, moreover, has been exceptionally broad-based—involving government as well as private debt, and observable in virtually all regions across the world.

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

According to the report, the prevalence of historically low global interest rates mitigates the risk of a crisis for now. But the record of the past 50 years highlights the dangers: 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.

Rising debt across the world has been a big concern for investors and has also been flagged as the next breaking point by a number of economists. Record-low interest rates make it extremely easy for corporates and sovereigns to borrow more money, it stated.

The report also shows the world’s major economies led by the United States and China have debts on average of more than 70 percent of GDP, the highest level of the past 150 years except for a spike around the second world war — raising profound questions about the sustainability of the global debt pile.

Unlike earlier eras, when governments typically ran surpluses during peacetime, the pressures of modern democracy and welfare systems have made persistent deficits the norm in many countries. Meanwhile, anyone hoping for a repeat of the great deleveraging of 1945-80, when the national debt-to-GDP ratios of the UK, France, Japan, Australia, and Canada fell by more than 100 percentage points, could be in for a disappointment.

“The problem in sustainably recreating such a scenario today is that the post-WWII era saw much higher levels of GDP growth due to favorable demographics, post-war reconstruction, and high productivity growth,” the report said.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com