The
World Bank has highlighted the risk of a fresh global debt crisis after warning
of the biggest build-up in borrowing in the past 50 years.
In
its half-yearly Global Economic Prospects (GEP), the Washington-based
organisation said of the four waves of debt accumulation since the 1970s, the
latest was the largest, fastest and most broad-based.
© Getty US dollar and China Yuan banknoteThe World Bank, which provides loans and
grants to developing and emerging economies to help tackle poverty, said there
could still be a financial crisis even though historically low interest rates
were making debts more manageable.
“Low
global interest rates provide only a precarious protection against financial
crises,” said Ayhan Kose, a World Bank official. “The history of past waves of
debt accumulation shows that these waves tend to have unhappy endings. In a fragile
global environment, policy improvements are critical to minimise the risks
associated with the current debt wave.”
Total
emerging and developing economy debt reached almost 170% of gross domestic
product in 2018 – or $55tn (£42tn) – an increase of 54 percentage points of GDP
since 2010. China accounted for the bulk of the increase – in part due to its
size – but the build-up was broad-based, and included other big emerging
economies such as Brazil.
The
World Bank said financial turmoil in emerging and developing economies was one
of the threats to its forecast of a slight strengthening of global growth this
year, from 2.4% to 2.5%.
The
modest pick-up in activity would depend, the GEP said, on a better year for
some of the large emerging economies – such as Argentina, Mexico and Turkey –
that struggled in 2019. But the World Bank stressed there were downside risks
to its forecast.
“This
rebound is not broad-based; instead it assumes improved performance of a small
number of large economies, some of which are emerging from a period of
substantial weakness. About a third of emerging market and developing economies
are projected to decelerate this year due to weaker-than-expected exports and
investment.”
The
World Bank’s concerns that countries could be borrowing excessively stem from
the recent history of financial distress, with each crash preceded by an
accumulation of debt. The build-up since 2010 had been concentrated in emerging
and developing countries rather than in advanced nations.
In
about 80% of emerging and developing economies total debt was higher in 2018
than in 2010 and the World Bank said they had been “navigating dangerous
waters” because the current wave of borrowing had coincided with a decade of
repeated growth disappointments. Heavily indebted countries were now confronted
by weaker growth prospects in a fragile global economy.
The
GEP said debt was rising among emerging countries, in contrast with previous
episodes – such as the 1980s Latin American debt crisis – when the debt
build-up was region specific. More than a third of emerging and developing
economies had experienced an increase in debt of at least 20 percentage points
of GDP. In addition, debt accumulation had been in both the public and private
sectors, which contrasted with past waves when the build-up was either by the
government or private firms.
The
World Bank said countries should seek to reduce the likelihood of crises and
lessen their impact should they materialise by building resilient monetary and
fiscal frameworks, instituting robust supervisory and regulatory regimes, and
following transparent debt management practices.
“However,
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,” it said.
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