The size, speed, and reach of the postcrisis debt buildup in Emerging market and developing countries (EMDEs) raises concerns about its potential consequences for macroeconomic and financial stability. To shed light on these consequences, this study presents the first in depth analysis of four waves of debt accumulation, puts the current debt wave into historical perspective, analyzes national episodes of debt accumulation, examines the links between debt accumulation and financial crises, and draws policy lessons. The study employs a wide range of approaches, including event studies, econometric models, country case studies, and a detailed review of historical episodes.
Although EMDEs have gone through periods of volatility in the current wave of debt accumulation, they have not experienced widespread financial crises. The exceptional size, speed, and reach of debt accumulation in EMDEs during the fourth wave, however, should give policy makers in EMDEs pause. Despite the sharp rise in debt, these economies have experienced a decade of repeated growth disappointments and are now facing weaker growth prospects in a fragile global economy. In addition to their rapid debt buildup, they have accumulated other vulnerabilities, such as growing fiscal and current account deficits and a shift toward a riskier composition of debt. Thus, despite exceptionally low real interest rates, and prospects for continued low rates in the near-term, the current wave of debt accumulation could follow the historical pattern and culminate in financial crises in these economies. A sudden global shock, such as a sharp rise in interest rates or a spike in risk premiums, could lead to financial stress in more vulnerable economies. Among low-income countries, the rapid increase in debt and the shift from concessional toward financial market and non-Paris Club bilateral creditors have raised concerns about debt transparency and collateralization. Elevated debt in large EMDEs could amplify the impact of adverse shocks and trigger a downturn in these economies, posing risks to global and EMDE growth.