Corporate debt in developed and emerging markets increased by more than $12 trillion during the pandemic as companies bolstered their balance sheets and borrowed to weather economic shocks. But even as global debt as a share of gross domestic product is falling, corporate finances are being squeezed by skyrocketing interest rates and high debt servicing costs.
This accumulation of risk in the corporate sector and the doubling of funding costs for even the safest issuers could pose serious problems for many economies and their financial systems. A new machine-learning model developed by IMF staff predicts the likelihood that corporate distress will translate into systemic economic risks, based on lessons from previous crises in 55 advanced and emerging economies since 1995. I’m here. Credit expansion and overvalued assets – may have the power to predict future crises and train models.
As this week’s chart shows, tightening global financial conditions have led to a sharp increase in the number of countries with medium to high contagion risk from corporate defaults and other forms of corporate distress last year. This has reversed the decline in risk seen in 2021 as policymakers raced to help battered firms with cash and debt forgiveness.
Thirty-eight of the economies tracked by our early warning model are at moderate risk, and seven economies, mainly in Europe and Asia, are at high risk of systemic corporate distress. More countries are at greater risk than before the pandemic. Moreover, the share of large countries in this category is increasing, with high-risk countries accounting for 21% of global GDP in Q3 2022, up from just 1% at the end of 2019. Risk.
After a sharp increase in 2020-2021, international debt issuance by non-financial companies fell by $136 billion in the year to June 2022, according to Bank for International Settlements data.
As global financial conditions tighten further, the risks faced by both advanced and emerging economies will increase. Spillovers from the business woes include slowing economic growth, rising unemployment, pressure on vulnerable households, volatile asset prices, and a surge in non-performing loans for financial institutions. Other factors, such as a stronger dollar, could also exacerbate the situation, adding to the pressures faced by many emerging economies.
time to act
What can government do? First, as he explained in his previous IMF blog, countries where companies have failed or are likely to develop effective bankruptcy systems have sought to reduce the number of heavily indebted companies to limit systemic risk. Market-driven restructuring should be promoted. National crisis preparedness and bankruptcy frameworks are critical and may be strengthened, especially in emerging markets.
Second, countries should continue to use macro- and micro-prudential policies targeting riskier sectors and borrowers. Countries should also use lender-side macroprudential policies for banks and other financial institutions to limit the potential contagion to the financial sector. For example, by improving the transparency of lenders’ assets and liabilities, refraining from further lending to companies unable to service existing debt, strengthening capital buffers and conducting comprehensive stress tests.
Burg Hasbeder Senior economist in the IMF’s Strategy, Policy and Assessment Department. He holds PhD, Masters and MBA degrees from the University of Oxford. Her research interests include asset pricing, international finance, and macroprudential policy.
Nittsu Ward He is an Economist (EP) at the IMF’s Strategy, Policy and Appraisal Division. He holds a PhD in Finance from the University of California, San Diego. His main research interests are asset pricing and economic forecasting with a focus on investor learning.
