Five lessons from the new World Bank debt statistics
The latest International Debt Statistics have been released last month and provide a comprehensive picture of debt flows until 2023. The report's foreword emphasized the alarming trend of substantial capital outflows from developing countries since 2022, coinciding with rising global interest rates, which has exacerbated their financial vulnerability and fragility.
Frontier markets are facing unique challenges due to their dependence on global financial flows, making them particularly prone to economic shocks. These nations not only struggle to stabilize independently but also lack a robust global financial safety net to assist them during crises.
2022 vs. 2023: A Worsening Landscape
While 2022 was a disastrous year, 2023 was even worse. This deterioration was exacerbated by the rise of global interest rates, which reached their peak in 2023 – for instance, the US 10-year Treasury reached 4.85% in October 2023, before starting to slide down. The rising interest bill added to an already strained environment, suffering from a series of adverse shocks that significantly impacted developing countries.
Five Key Lessons
We have derived five lessons from the recently released data.
Together, these trends show that the situation of systemic tightness that exploded in 2022 has further worsened, albeit in a different manner, with heightened pressure from interest payments compared to amortization. Like 2022, we observe the ongoing paradox of low debt levels and high financial pressures. The developing countries’ external debts remain limited, but they are concurrently suffering from the withdrawal of bilateral and private creditors at a time when multilateral providers step up their financing. This precarious situation is unsustainable and will end up hurting all parties involved unless properly addressed. However, achieving a pause in outflows remains a collective action challenge.
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Lesson 1: Capital is flowing in the wrong direction – and it is getting worse
External debt flows to developing countries are negative for the first time in decades, with record outflows and a reversal of short-term debt
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Lesson 2: Higher interest payments are the leading cause of the 2023 deterioration
Higher global interest rates have translated immediately into higher interest payments for institutions lending at variable rates, and especially the non-concessional multilateral banks.
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Lesson 3: But external debt stocks remain relatively low and are falling
External debt stocks, total as well as public only, decline for low and upper-middle income countries, but increase slighlty for lower-middle income countries.
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Lesson 4: Large leakages from official to commercial creditors continue unabated
External debt stocks, total as well as public only, decline for low and upper-middle income countries, but increase slighlty for lower-middle income countries.
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Lesson 5: There are important shifts in the composition of private lenders
Commercial banks have risen where bond financing has stagnated or declined. This is especially the case for private borrowers.
