Private Debt A Hidden Risk To Global Economy, World Bank Says

Especially developing countries must quickly strengthen their financial sectors, the World Bank said on Tuesday, warning that rising inflation, interest rates and alarming levels of debt distress could trigger a global chain reaction not seen in generations.

The World Bank underscored its longstanding concerns about lack of transparency about Chinese lending and collateralized loans in the sovereign debt sector, but also called out growing private sector risks in its latest World Development Report.

The bank’s surveys showed 46 per cent of small and medium-sized businesses in developing countries expected to fall behind on debt payments within six months, but the number was twice as high in some countries, chief economist Carmen Reinhart told media in an interview ahead of the report’s release.

Ms. Reinhart said she was keeping a close eye on private sector debt developments in bigger emerging markets like India, South Africa, the Philippines, and Kenya, where more than 65 per cent of small and medium-sized companies expected to be in arrears.

She told an online World Bank event that the share of countries in or at risk of debt distress was in “alarming territory,” but financial sector policies were also needed to address risks posed by rising debt among households and firms.

A Need For A Better Transparency

Massive fiscal and monetary support had helped mitigate the consequences of the economic crisis triggered by the pandemic, but forbearance policies and relaxed accounting standards could be obscuring a “hidden non-performing loan problem,” she assessed.

There’s a huge need for better transparency on the private sector debt, Ms. Reinhart stated.

What gets you in the end is not so much what you see, but what you don’t see, she concluded, warning against a false sense of complacency about financial health of households and firms.

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