(File photo)

World Bank warns of looming financial crisis as debt reaches record levels

(File photo)

With the debt stock in emerging and developing countries rising to a record US$55 trillion in 2018, the World Bank Group has urged governments to strengthen their country’s economic policies in order to mitigate the impact of financial shocks.

According to the World Bank study ‘Global Waves of Debt’, the “surge” in global debt accumulation is the largest, fastest, and most broad-based since 1970. The report goes on to warn of a looming financial crisis, stating that, based on historical events over the last fifty years, financial crises usually follow or accompany waves of debt accumulation.

With this in mind, World Bank President David argues that the growing debt figure should be cause for concern for everyone. “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,” he stated in a release from the institution.

Further, the World Bank study found that the debt-to-GDP ratio of developing countries has increased by 54 percentage points to 168 per cent since 2010, when the debt accumulation started. On an annual basis, the debt ratio has grown by about seven percentage points on average — or approximately three times as fast it did during the Latin America debt crisis of the 1970s.

Concerned about growing debt stocks for developing and emerging economies, World Bank Group President David Malpass says debt management and transparency need to be top priorities for policymakers.

Noting that there have been four waves of debt accumulation over the past fifty years, with three resulting in financial crises in developing and emerging economies, the study indicates, however, that there are three features that distinguish the current debt wave from those before.

First, the current wave of debt accumulation is characterised by a combination of both government and corporate bonds from across all regions of the world.

Second, while the report pointed out that “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”, it also notes that “the prevalence of historically low global interest rates” has reduced the risks associated with the occurrence of a financial crisis.

Third, China, with a debt-to-GDP ratio that has risen 72 points to 255 percent since 2010, continues to be a driver behind the latest surge in debt. However, when excluding China from the total, debt is significantly higher in emerging and developing economies — twice the nominal level reached in 2007.

Considering these new features “pose challenges that policymakers haven’t had to tackle before”, the World Bank urges policymakers to develop mechanisms that facilitate debt resolution when it becomes necessary.

“Policymakers should act promptly to enhance sustainability and reduce exposure to economic shocks.” — World Bank Group Vice-President for Equitable Growth, Finance, and Institutions Ceyla Pazarbasioglu (Photo: Daily Maverick)

World Bank Group’s Vice President for Equitable Growth, Finance, and Institutions Ceyla Pazarbasioglu concurs, stating that the impact of financial crises has cost populations in developing economies most.

“Policymakers should act promptly to enhance sustainability and reduce exposure to economic shocks,” she said.

The report also recommends greater “debt transparency”.