The International Monetary Fund (IMF) yesterday warned against the profile of rising debts in emerging markets and low income countries, saying the trend constitutes direct risk to the countries’ financial stability.
The IMF’s Financial Counsellor and Director of the Monetary and Capital Markets Department, Tobias Adrian, gave this charge during the Global Financial Stability report presentation at the ongoing IMF/World Bank Spring Meetings in Washington D.C.
He however assured that the IMF was ready to provide sound debt management assistance to Nigeria and other emerging market countries, in line with its debt sustainability framework for low income countries and emerging market economies, pointing out that short-term risks to financial stability have increased, and medium term risks remain high, while vulnerabilities in global markets may make the roads ahead bumpy, and put growth at risk.
On the implication of Nigeria’s current debt profile, Adrian said: “We do not go into the details of specific countries in the report. There will be regional press briefing on Friday that is looking more specifically at different regions, in particular at Sub-Saharan Africa; and specific country questions can be raised at that point. In general, what we see in many emerging and low-income countries is that debt levels are rising and that underwriting standard of foreign debts are deteriorating, and that is a risk for financial stability of those countries.”
He said: “Rising foreign debts remain a big risk to financial stability. The debts that are accumulated quickly are deteriorating and could pose financial stability crisis in the future in emerging markets,” adding that the Fund has continued to track debt issuance programmes in emerging markets which Nigeria belongs. The bank-dollar liquidity mismatches also remain a concern, he stated.
He said pick-up in inflation might lead to a more rapid withdrawal of monetary accommodation by central banks, leading to sudden tightening in financial conditions and a sharp fall in asset prices, saying that the remedy is for central banks to continue to normalise monetary policy, and communicate their decisions clearly while addressing financial vulnerabilities by strengthening fundamentals and building buffers.
He advised that proceeds from the debts should be invested in high-yielding assets to bring the high returns for the economy.
Adrian said the international US-dollar balance sheets of non-US banks rely on short-term, or wholesale sources for about 70 per cent of their funding, a practice he stated that could leave banks exposed to dollar funding problems in the event of strains in markets. He therefore advised policy makers to ensure that the post-crisis regulatory reform agenda is implemented, and should resist calls for rolling back reforms.
“Our growth risk analysis which links financial conditions to the distribution of future global growth, indicates that under a severely adverse scenario, growth could be negative three years from now. Stretched valuations across many asset classes, borrowing by emerging markets and low income countries and bank-dollar liquidity mismatches remain vulnerabilities.”
He said that issuance of riskier bonds has surged, adding that debt sustainability in emerging markets and low income countries, has deteriorated and that a more complex creditor composition poses challenges for any future debt restructurings.
Also speaking, the IMF’s Director at the IMF’s Fiscal Affairs Department, Victor Gasper, said public debts were at historic high in emerging markets and have been associated with fiscal crises. He said debt servicing is also rising in countries with high inflation rates, saying there was no room for complacency, and that countries should strengthen their tax capabilities and deploy the resources in funding health, education and public infrastructure.
Gasper, who spoke at the Fiscal Monitor session, said that counties will be better placed to tackle looming risks if they build strong public finances in good times. He said in emerging market economies, debt at almost 50 per cent of Gross Domestic Product (GDP) on average, is at levels that in the past have been associated with fiscal crises, adding that average debt was only higher during the 1980s.
He said in the last 10 years, emerging market economies have been responsible for most of the increase in the $164 trillion global debt. “We urge policy makers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up. Instead, most countries should deliver on their fiscal plans and put deficits and debt firmly on a downward path,” he stated.
