Emerging market and developing economies (EMDEs) pushed their borrowing to a record $55tn (£42tn) last year, according to the World Bank, marking an eight-year surge that is the “largest, fastest and most broad-based in nearly five decades”.
While much of the growth in debt levels was driven by China, the Washington-based development agency said most of the 100 countries covered by its analysis were affected, following an increased dependency on borrowing by both private and public sector organisations.
The analysis in Global Waves of Debt, a study of the four significant episodes of debt accumulation since 1970, found the debt-to-GDP ratio of developing countries had climbed 54 percentage points to 168% since the debt buildup began in 2010.
The total includes all forms of debt – consumer, business and government – and illustrates the pressure on all parts of the economy to honour debt payments, mostly to banks and international investment funds.
On average, the debt-to-GDP ratio of the 100 countries affected increased by seven percentage points each year – nearly three times as fast as it did during the Latin America debt crisis of the 1980s.
Ceyla Pazarbaşioğlu, the World Bank’s vice-president for equitable growth, finance and institutions, said: “History shows that large debt surges often coincide with financial crises in developing countries, at great cost to the population.
“Policymakers should act promptly to enhance debt sustainability and reduce exposure to economic shocks.”
According to the report, the widespread adoption of historically low interest rates since 2008 by central banks to tackle low inflation has mitigated the risk of a crisis “for now”.
But the report argued the record of the past 50 years highlighted the dangers of presuming interest rates and inflation would remain low.
“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 said.
World Bank executives have previously argued that low-income countries should borrow on international money markets to fund investment and infrastructure spending. But since a fall in commodity prices in 2015, many countries have used borrowing to fund welfare payments, education, health costs and disaster relief.
The World Bank Group’s president, David Malpass, said: “The size, speed and breadth of the latest debt wave should concern us all.
“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 said policymakers in poorer and developing world countries should act promptly to strengthen their economic policies and make them less vulnerable to financial shocks.
The analysis found the latest wave differed from the previous three because it involved a simultaneous buildup in both public and private debt.
“There are concerns that governments are not as effective as they need to be in investing the loans in physical and human capital. In fact, in many developing countries, public investment has been falling even as debt burdens rise,” the report said.
In previous debt waves, the crises emerged from one or two regions. The World Bank said China, where the debt-to-GDP ratio has risen by 72 percentage points to 255% since 2010, accounted for a large minority of the debt.
“However, debt is substantially higher in developing countries even if China is excluded from the analysis – among EMDEs, it is twice the nominal level reached in 2007,” it said.
“Those characteristics pose challenges that policymakers haven’t had to tackle before. For example, non-resident investors today account for 50% of the government debt of emerging and developing economies, considerably more than in 2010. For low-income countries, much of this debt has been on non-concessional terms, and outside the debt-resolution framework of the Paris Club.”