New CEPR Policy Insight - Understanding the global waves of debt

The global economy has experienced four waves of rapid debt accumulation in emerging and developing economies over the past 50 years. The current wave of debt, which started in 2010, is unprecedented in its size, speed, and reach. While the previous three waves all ended with widespread financial crises, policymakers have a range of options to reduce the likelihood of the current debt wave suffering the same fate.

In this CEPR Policy Insight, ‘Understanding the global waves of debt’, World Bank and CEPR economists M. Ayhan Kose, Peter Nagle, Franziska Ohnsorge and Naotaka Sugawara examine the current build-up of debt in emerging market and developing economies (EMDEs), compare the current debt wave to its historical predecessors, and propose policy options to reduce the likelihood of the current debt wave ending in crisis, and, if crises were to take place, to alleviate their impact.

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Among the findings: 

• The debt accumulation in EMDEs since 2010 has already been larger, faster, and more broad-based than in the previous three waves (1970-89, 1990-2001, 2002-09), rising on average seven percentage points (pp) of GDP per year. Total debt has risen in 80% of EMDEs, and by at least 20pp of GDP in more than one-third of EMDEs. 
• EMDEs have seen their debt rise by 54 pp of GDP to a record high of about 170% of GDP in 2018.
• In major contrast to previous waves, which occurred in one or two regions, the current wave incorporates substantially more countries. 
• In addition to their rapid debt build-up, EMDEs have accumulated other vulnerabilities, such as growing fiscal and current account deficits and a riskier composition of debt.
• Accumulated debt in the current wave has seen an increase in both government and private debt, in contrast to the previous three waves, when the build-up was concentrated in one of the two sectors.
• In a highly uncertain global environment, EMDEs currently face a wide range of risks, including the possibility of disruptions in advanced-economy financial markets, steep declines in commodity prices, increased trade tensions, outbreaks of diseases, and a sudden deterioration in corporate debt markets in China. If any of these risks were to materialise, they could lead to a sharp rise in global interest rates, or risk premia, or weakening growth, and in turn, trigger debt distress in EMDEs.
• Despite record low interest rates, there is still a risk that the latest wave follows the historical pattern and ends in financial crisis. 

The lessons from the previous waves of debt highlight the critical role of prudent macroeconomic and financial policy frameworks. These include sound debt management and debt transparency, strong monetary and fiscal frameworks, and robust bank supervision and regulation. Although many emerging market and developing economies have better policy frameworks now than during previous debt waves, there remains significant room for improvement. 

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