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October 13, 2017

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IMF warns of debt in biggest economies

FOR the first time in years the International Monetary Fund is optimistic about global economic growth. But it sees a new problem: mounting debt in the world’s largest countries.

“Debt levels are increasing in G20 economies,” Tobias Adrian, who heads the IMF’s monetary and capital markets division, said Wednesday.

Among private businesses in those countries, leverage is higher than before the financial crisis. And the weight of debt service has also jumped in several top economies, he noted.

With central banks in the United States and Europe expected to tighten monetary conditions, he said, “This poses greater risks over time from sharp increases in interest rates.”

Introducing the IMF’s newest assessment of risk in the world’s financial system, Adrian noted that the extremely low interest rates of the past several years have allowed countries to borrow easily to finance their rebound from recessions.

And recovery is not yet complete, he noted, saying low rates are still needed.

At the same time, he said, “this environment is breeding complacency,” with risks building on several fronts.

Another side of the problem is the dependence of emerging market and lower-income economies on external funding, especially portfolio investment inflows. Around US$300 billion in such funds will flow into these countries in 2017, supporting their growth.

“This is broadly good news,” said Adrian.

“But this greater reliance on foreign borrowing may at some point become a vulnerability, particularly for low-income countries, if those resources are not put to good use.”

That leaves such markets vulnerable to shocks like geopolitical turmoil and jumps in interest rates, which would increase the cost of debt, and could spark sharp outflows in portfolio investment.

“It’s going to be a challenge especially when you move to a world where the Federal Reserve is going to raise US interest rates, global rates will rise, and debt service will rise,” Sonja Gibbs, of the Institute of International Finance, said.


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