The World Bank is warning that debt levels in most developing countries including China have hit the highest level in 50 years and many nations are “navigating dangerous waters”.
The total debt among developing countries hit US$55-trillion in 2018, or almost 170 per cent of gross domestic product, the bank said in a report released Wednesday. That compared with 114 per cent of GDP in 2010.
By contrast, the debt level in developed countries has remained largely steady since 2010 at about US$130-trillion or 264 per cent of GDP.
“While current low levels of interest rates mitigate some of the risks associated with high debt, previous waves of broad-based debt accumulation ended with widespread financial crises,” the report said. Developing countries “have been navigating dangerous waters as the current debt wave has coincided with a decade of repeated growth disappointments, and they are now confronted by weaker growth prospects in a fragile global economy.”
Based in Washington, the World Bank focuses on providing financial resources and advice to developing countries. The bank said on Wednesday that it expected the global economy to be sluggish in 2020 with overall economic growth forecast to rise by 2.5 per cent, up from 2.4 per cent in 2019. Growth in advanced economies is expected to fall to 1.4 per cent this year, from 1.6 per cent in 2019, the report added.
Developing economies are forecast to grow by 4.1 per cent this year, up from 3.5 per cent in 2019. However, that growth rate hinges almost entirely on an economic recovery in eight countries – Argentina, Brazil, India, Iran, Mexico, Russia, Saudi Arabia and Turkey – which have experienced deep recessions or stagnation in recent years. All of those countries are expected to rebound this year but, if that doesn’t happen, the bank said global economic growth will slow.
Franziska Ohnsorge, manager of the bank’s development-prospects group, said the bank has highlighted soaring debt levels as a major issue because the past 10 years have seen “the fastest, largest and most broad-based increase in debt in emerging markets and developing economies.” Even with low interest rates, “these countries are borrowing so much that debt is on a rising trajectory in half of developing economies. Low interest rates are no guarantee to sustainable debt stocks.”
She added that while China accounted for much of the growth in debt, nearly every other developing country has also experienced a sharp increase in debt. Excluding China, the total debt in developing countries hit 107 per cent of GDP in 2018 and roughly one-third of countries have seen increases of at least 20 percentage points of GDP since 2010. “This goes far beyond China,” Ms. Ohnsorge said.
The report noted that many developing countries are now vulnerable to a sudden increase in interest rates or an unexpected economic slowdown. Most are also in a far weaker financial position to handle the rising debt load and a larger percentage of the amount owed is in riskier forms. For example, the report said there has been an increase in the share of debt held by non-residents and denominated in foreign currencies. A greater percentage of corporate debt is also held by firms with riskier financial profiles.
Ms. Ohnsorge said that low interest rates have largely pushed the problem aside and many forecasters don’t expect rates to rise very much for at least two years. “What we are saying here is that that is being complacent because interest rates may not stay low and growth may not stay as high as it is,” she said. "You can have disruptions to financial markets, and you can have growth slowdowns … and then this debt does become unsustainable and very difficult to service.”
The report also noted that economic growth in the poorest countries fell to 5.4 per cent in 2019, from 5.8 per cent in 2018. It is expected to remain at that level for the next two years. The slowdown was owing largely to weaker commodity prices, political instability and extreme weather events. While growth is forecast to pick up to 5.7 per cent by 2022, it will be “insufficient to markedly reduce poverty”. In some poor countries, per capita GDP is expected to grow by just 1 per cent from 2020 to 2022, after contracting last year. “As a result, the number of people living below the international poverty line of [US]$1.90 per day will remain elevated, while continuing to rise among fragile [countries],” the bank said.