Global financial stability is “not yet assured”, the International Monetary Fund has warned, as it said emerging market debt had more than quadrupled over the last decade.
The stark warning, from the director of the IMF’s Monetary and Capital Markets Department Jose Vinals, comes just a day after the IMF said the outlook for emerging markets had weakened.
The corporate debt of non-financial firms across major emerging market increases from about $4 trillion (£2.6 trillion) in 2004 to well over $18 trillion in 2014, according to the IMF.
While the build up of debt can bring important benefits, such as more investment and faster growth, the IMF said many emerging market financial crisis had been preceded by rapid increases in debt. It also highlighted that the debts had build up in the highly cyclical construction sector but also in the oil and gas sector, leaving emerging market corporate balance sheets vulnerable to the oil price fall and economic slowdown.
The IMF said that “recent market developments such as slumping commodity prices, China’s bursting equity bubble and pressure on exchange rates” underscored the challenges faced by emerging markets, many of which are commodity exporters.
One catalyst for a crisis could be US rate hike. With the US economy strengthening and the Federal Reserve poised to raise rates over the coming months, the dollar could rise further in value. This makes it harder for individuals and businesses in foreign countries who have borrowed in dollars to service their debts.
"The prospect of the US Federal Reserve gradually raising interest rates points to an unprecedented adjustment in the global financial system,” the IMF said.
The research builds on a report from the IMF yesterday that said the outlook for advanced economies such as the UK and US was improving, while the prospects for emerging markets had weakened.
“Without the implementation of policies to ensure successful normalisation [of interest rates from record lows], potential adverse shocks or policy missteps could trigger an abrupt rise in market risk premiums and a rapid erosion of policy confidence,” the IMF said. Any such shock could knock three per cent off global GDP over the next two years, the IMF said.