Good morning and thanks for joining.
We identified the stagflation risk early in the year. The deterioration is continuing. This brings three risks: a global recession in 2023; a multi-year period of slow growth; and widespread asset repricing as higher interest rates are applied, and hedges run out. Many of the impacts will be delayed even into 2024 and 2025 including debt restructurings.
Interest rates were very low for a long period allowing a huge use of capital by fully-funded governments and business sectors. This misallocation of global capital undercuts growth and productivity and will take time to repair. For now, many previously announced spending and construction plans are still being executed – so the full impact of higher interest rates and energy prices will hit new investment after a delay. This has consequences for financial distress spanning governments, housing, businesses, and pensions.
Energy prices are a major factor, with shortages of fertilizer and food hitting people in the poorest countries particularly hard. Under current policies, energy supply increases may take years, prolonging the stagflation risk. The negative impact depends heavily on energy production and storage decisions, especially by the biggest economies; and on the continuation of Russia’s war in Ukraine.
The combination of extremely high government debt levels and rising interest rates will cause heavy absorption of global capital by advanced governments for a prolonged period. Since capital markets are forward looking, the negative impact of this drain on global capital depends on debt limits, meaning the size of prospective government spending and the decision-making process behind it.
For developing countries, this is a grim outlook, both in the near term and the medium term. I call it a crisis facing development. Access to electricity, fertilizer, food and capital is likely to remain limited for a prolonged period. Under-investment in businesses are blocking future growth. These problems compound the already-devastating reversals in education, health, poverty, and infrastructure and the increasing demands from climate change. Currency depreciation is making inflation, debt and impoverishment worse.
The World Bank’s latest debt statistics report released today makes it clear that a debt crisis in the world’s poorest countries is intensifying.
The total external debt of low- and middle-income countries doubled over the last decade, reaching $9 trillion at the end of 2021. For the IDA-eligible countries, the poorest, debt reached $1 trillion, nearly tripling since 2010. Their debt service payments on external public and publicly guaranteed debt are expected to surge 35 percent in 2022, to $62B up from $46 billion in 2021. This will exhaust scarce fiscal resources needed for electricity, water, nutrition, health, education, and climate action. Over 40 IDA-eligible low-income countries are at high risk of debt distress or already in it. Debt crises are also spreading to middle-income countries.
The composition of debt has changed dramatically too, making much-needed debt restructurings harder.
More of the debt is to private creditors. Debt owed by low- and middle-income countries on their public and publicly guaranteed debt to private creditors at the end of 2021 was 61%, that’s up from 46% in 2010. Much of that increase came from increased bond issuance, with bondholders now accounting for nearly 80 percent of privately held debt. For IDA countries, this was $76 billion owed to bondholders, making restructurings difficult.
And more of the debt is owed to non-Paris Club creditors. That’s another change in the composition. Debt owed to government creditors that don’t belong to the Paris Club has soared. China is the biggest example of the trend: At the end of 2021, China was the largest bilateral creditor to IDA countries, accounting for $100 billion of their bilateral debt stock, that is up from $15 billion in 2010. This year, China is expected to account for 66 percent of the debt-service payments these countries will be making on their official bilateral debt. While China’s debt stock is roughly half of bilateral debt, its debt service payments are around 2/3 of bilateral debt service payments.
To address the increase in debt and the new composition, I’ve focused on improvements in three areas — debt sustainability, transparency, and restructuring. Progress in each area is important to achieve satisfactory outcomes for development.
Debt sustainability is deteriorating not only in IDA countries, but also in many middle-income countries and the outlook is very challenging from sustainability standpoint.
More transparent debt data improves debt management, and makes debt restructurings less difficult to implement. Even the simple reconciliation of debt is ditfficult under current practices. It is not in any creditor’s long-term interest to keep public debt hidden or artificially protected through non-disclosure clauses, complex debt-like instruments, collateralization, and escrow accounts.
As part of our commitment to debt transparency, the World Bank’s International Debt Statistics database provides the world’s most comprehensive source of comparable cross-country information on the external debt of low- and middle-income countries. Over the past five years, this database has identified and added $631 billion of previously unreported loan commitments. In just 2021, an additional $44 billion was identified.
On debt restructuring, new mechanisms are needed to reflect the new creditor landscape. With the debt situation deteriorating rapidly I’ve regularly proposed a series of reforms to the debt restructuring process to make it faster, more inclusive, and more effective at helping countries return to sustainability.
Later today I will be going to China. Together with the Kristalina Georgieva from the IMF, we will engage with Chinese authorities and with their policy banks – the China ExIm Bank and the China Development Bank — on the need for faster progress on resolving unsustainable debt and the need for more transparency.
Thank you very much and I look forward to your questions.