Caught by a Cresting Debt Wave

Author:M. Ayhan Kose, Franziska Ohnsorge, Peter Nagle, and Naotaka Sugawara
Position:M. AYHAN KOSE is director of the World Bank's Prospects Group, where FRANZISKA OHNSORGE is manager and PETER NAGLE and NAOTAKA SUGAWARA are senior economists.

Past debt crises can teach developing economies to cope with COVID-19 financing shocks.

CAUGHT b e cresting
he COVID-19 pandemic is a blow to an
already f ragile globa l economic outlook.
e health crisis, shar p downturn in
activity, and turmoil in globa l nancial
markets caught emergi ng market and developing
economies at a bad moment. e past decade has
seen the largest, fastest, and most broad-based
increase in debt in these ec onomies in the past
50 years. Since 2010, their total debt rose by 60
percentage points of GDP to a historic peak of
more than 170 percent of GDP in 2019 (see Chart
1). Although China accounted for the bulk of this
increase—in pa rt due to its sheer size—t he debt
buildup was broad-based: in about 80 percent of
these economies, total debt wa s higher in 2018 than
in 2010. Even excluding China, debt rose by 20
percentage points of GDP, to 108 percent, in 2019.
As these economies respond to the pa ndemic, their
debt will only increase.
e current global recession is unusu al in its sever-
ity. Like previous crises, it is testing t he resilience of
heavily indebted countries and compan ies.
What policies do highly i ndebted emerging
market and developing economies need to imple-
ment to mitigate the damage of the pandemic
and support a durable recovery? History can give
policymakers some useful pointers.
Debt waves
As documented in our recent study, Global Waves of
Debt, before the current period, emergi ng market
and developin g economies experie nced the follow-
ing three waves of broad-based debt accu mulation
between 1970 and 2009:
1970 –8 9: A combination of low real i nterest
rates and a rapidly growing sy ndicated loan
market through much of the 1970s encouraged
governments in Latin Americ a and low-income
countries, especial ly in sub-Sahar an Africa, to
borrow heavily—culminating in a series of
nancial crise s in the early 1980s. A prolonged
period of debt relief and restructu ring followed—
through the Brady Plan, the Heav ily Indebted
Poor Countries Initiative, and the Multilatera l
Debt Relief Initiative (the latter two with I MF
and World Bank support)—yet this was sti ll a
lost decade for growth and povert y reduction.
1990 –2001: Fina ncial and capital ma rket lib-
eralization enabled ba nks and businesses in east
Asia and the Pacic and governments i n Europe
Past debt crises can teach developing economies to cope with COVID-19 financing shocks
M. Ayhan Kose, Franziska Ohnsorge, Peter Nagle, and Naotaka Sugawara

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