Since 2010, debt in emerging market and developing economies has grown to record highs. Current low interest rates —which markets expect to be sustained in the medium term—appear to mitigate some of the risks associated with high debt. However, emerging market and developing economies (EMDEs) also face weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood of the current debt wave ending in crises and, if crises were to take place, to alleviate their impact.
1. Debt has reached a record-high
Global debt reached a record-high of about 230 percent of global GDP in 2018. Total EMDE debt also reached an all-time high of about 170 percent of GDP in 2018, an increase of 54 percentage points of GDP since 2010.
Debt in EMDEs
Note: Dashed lines refer to EMDEs excluding China. Aggregates calculated using current U.S. dollar GDP weight and shown as a 3-year moving average. Gray vertical lines represent start of debt waves in 1970, 1990, 2002, and 2010.
2. Post-crisis debt accumulation has been exceptionally rapid
Over the past fifty years, there have been four historical waves of debt accumulation: 1970-89, 1990-2001, 2002-09, and since 2010. The latest wave, which started in 2010, has been the largest, fastest and most broad-based increase of the four.
Annual average change in total debt
Note: Annual average change in debt calculated as total increase in debt-to-GDP ratios over the duration of a wave, divided by the number of years in a wave.
3. Both private and public sectors have been accumulating debt
Rapid increases in debt are common among EMDEs. Between 1970 and 2009, the sector accumulating debt shifted from the public to the private sector. However, since 2010, both governments and private sectors have rapidly accumulated debt.
EMDEs in rapid debt accumulation episodes
Note: Share of EMDEs in the sample that are in rapid debt accumulation episodes. Rapid debt accumulation episodes are defined as years in which the change in the debt-to-GDP ratio from its trough to its peak exceeds one standard deviation.
4. Rapid debt buildup has, in the past, been associated with financial crises.
Roughly half of the rapid debt accumulation episodes in EMDEs have been associated with financial crises. Episodes with crises featured significantly weaker output, consumption and investment growth.
Share of national debt accumulation episodes associated with financial crises
Note: Crisis dates from Laeven and Valencia (2018) and include currency crises, sovereign debt crises and systemic banking crises. Sample period covers 1970-2018.
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