In emerging and developing economies over the last decade, growth has slowed while debt has increased. © World Bank Group

One feature overshadowing the outlook is the largest, fastest, and most broad-based wave of debt accumulation among emerging and developing economies in the last 50 years. Total debt among these economies climbed to about 170% of GDP in 2018 from 115% of GDP in 2010. Debt has also surged among low-income countries after a sharp drop over 2000-2010.

The current wave of debt differs from previous ones in that there has been an increase in the share of non-resident holdings of EMDE government debt, foreign currency-denominated private EMDE debt, and, for low-income countries, borrowing from financial markets and non-Paris Club bilateral creditors, raising concerns about debt transparency and debt collateralization.

Growth- enhancing investments, such as in infrastructure, health care, and education. Debt accumulation can also be appropriate in economic downturns as a way to stabilize economic activity.

However, the three previous waves of debt accumulation have ended badly – sovereign defaults in the early 1980s; financial crises in the late 1990s; the need for major debt relief in the 2000s; and the global financial crisis in 2008-2009. And while currently low interest rates mitigate some of the risks, high debt carries significant risks. It can leave countries to vulnerable to external shocks; it can limit the ability of governments to counter downturns with fiscal stimulus; and it can dampen longer-term growth by crowding out productivity-enhancing private investment.

This means that governments need to take steps to minimize risks associated with debt buildups. Sound debt management and debt transparency can keep a lid on borrowing costs, enhance debt sustainability, and reduce fiscal risks. Strong regulatory and supervisory regimes, good corporate governance, and common international standards can help contain risks, ensure that debt is used productively, and identify vulnerabilities early.