In its recently released, biannual, Global Economic Prospects (GEP) report, the World Bank issued a warning that the current debt wave (the 4th in the past 50 years) is the largest, fastest-growing and most broad-based. It shows that in 2018, the total debt in “Emerging Markets and Developing Economies” rose to almost 170% of GDP. It warned that even though historically low-interest rates were making debts more manageable, the opportunity for a major financial crisis still very much exists. Generally speaking, history shows us that low global interest rates provide a very precarious form of protection against the financial crisis. The new and extensive use of negative interest rates most certainly will exacerbate the situation further.
China is proportionately responsible for the bulk of the debt and overall the debt has seen an increase of 54 percentage points of GDP since 2010. The GEP projects a GDP increase from 2.4% to 2.5% this year. Turmoil in some emerging and developing economies could affect the projection, but the slight increase is based on anticipated improvement in some large emerging economies that struggled in 2019, namely Argentina, Mexico, and Turkey. The report determined that the “rebound is not broad-based; instead, it assumes the improved performance of a small number of large economies, some of which are emerging from a period of substantial weakness. About a third of the emerging market and developing economies are projected to decelerate this year due to weaker-than-expected exports and investment.”
The World Bank’s biggest concern is that excessive borrowing could be stemming from the recent history of financial distress, with each crash preceded by an accumulation of debt. “The buildup since 2010 had been concentrated in emerging and developing countries rather than in advance nations.” 80 % of the total debt of emerging and developing economies was found to be higher in 2018 compared to 2010. Again, the World Bank is concerned, due to the fact they had been “navigating dangerous waters” because the current wave of borrowing had coincided with a decade of repeated growth disappointments. Already indebted countries will now be confronted by weaker growth prospects in an already fragile global economic environment.
The World Bank issued a suggestion that countries anticipating lower GDP do everything in their power to build resilient monetary and fiscal frameworks, institute robust supervisory and regulatory regimes, and follow transparent debt management policies. As a final warning, it stated, “…high debt carries significant risks for emerging and developing economies, as it makes them more vulnerable to external shocks. The rollover of existing debt can become increasingly difficult during periods of financial stress, potentially leading to a crisis.”
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