Do Developing Economies Have a Debt “Problem”?

Executive Summary

External debt in the developing economies has risen noticeably over the past few years. It was an unsustainable buildup in external debt in the 1990s that led to a series of financial crises that swept through the developing world in 1997-98. Should we worry that the events of twenty years ago are about to reoccur?

In our view, the developing world is not yet on the cusp of a generalized financial crisis. Although the amount of external debt in the developing world has clearly increased over the past few years, so too has the ability of most of those economies to service their external debt obligations. That is not to say that individual economies, for example Ukraine and Venezuela, are not at risk. But a generalized financial crisis due to an unsustainable buildup of external debt in the developing
world does not appear to be imminent. That said, a reassessment may be in order if the debt servicing ability of developing economies were to deteriorate in coming years.

Is It 1997 All Over Again?

In a report that we wrote a few years ago, we noted the rise in debt that was occurring in many developing economies at that time. 1 We concluded in that report that “we do not believe that a wave of financial crises in the developing world is just around the corner, but developments in these economies bear watching in coming years.” Leverage in the developing world has increased even further in the intervening four years since we wrote that report. Therefore, we believe it is time to update our analysis to determine whether or not developing economies have a debt “problem” today. We start our analysis in this first of two reports by looking at external debt, which is the debt owed to foreigners by a country’s household, business and government sectors.2 The outstanding amount of external debt in 21 large emerging market economies shot up from less than $4 trillion in 2009 to more than $6 trillion in 2014 (Figure 1).3 Although the outstanding debt stock has subsequently edged lower, most of that decline is attributable to China, where external debt dropped from nearly $1 trillion in 2014 to about $500 billion last year. Excluding China, the amount of external debt in our sample of countries remains near its 2014 peak. 

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