IMF alert over ris­ing debt in G20 coun­tries

> Lever­age higher than be­fore the fi­nan­cial cri­sis, di­vi­sion head notes

The Sun (Malaysia) - - SUNBIZ -

WASHINGTON: For the first time in years the In­ter­na­tional Mone­tary Fund (IMF) 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 on 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 US and Europe ex­pected to tighten mone­tary con­di­tions, Adrian said: “This poses greater risks over time from sharp in­creases in in­ter­est rates.”

He 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 said, adding that low rates are still needed.

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

That is true es­pe­cially for the su­per­stars of the emerg­ing economies like China, Brazil, and Turkey.

China con­tin­ues to fund growth with the ex­pan­sion of credit, he noted, par­tic­u­larly “shadow” credit – lend­ing out­side the reg­u­lated bank­ing sys­tem.

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 (RM1.26 tril­lion) 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 low­in­come 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. – AFP

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