Defusing debt risks – Opinion

Collective actions are needed to maintain financial stability in Asia

Asian developing countries are facing a serious debt situation. The current debt-to-GDP ratio of developing countries in Asia is much higher than the international red line for developing countries of 60%. According to the International Monetary Fund, the public debt-to-GDP ratio of emerging and developing economies in Asia was 71.8% in 2021, a level second only to Latin America and the Caribbean.

And, in 2021, the external debt of emerging and developing Asia grew by 20.7% from 2019 levels, the fastest growth rate among all emerging market and developing economy regions. .

There are mainly three factors at the origin of the risks of indebtedness.

First, the COVID-19 pandemic has pushed up some countries’ debt levels. The pandemic has led to a substantial increase in government public spending, while slowing or even reducing the growth of tax revenues, leading to a sharp increase in public deficits. The pandemic has also led to a decline in some countries’ earnings from overseas remittances. These factors have exacerbated the difficulties of some countries in repaying their external debts.

Second, the tightening of US monetary policy is increasing the debt burden of Asian countries. Bond yields in Asian economies were pushed higher, adding to debt risks. Meanwhile, with the Fed’s monetary policy tightening, the US dollar entered an appreciation cycle and the currencies of some Asian economies depreciated sharply against the US dollar, increasing their debt burdens denominated in currencies. U.S. dollars.

Third, the Russian-Ukrainian conflict has further aggravated the debt difficulties of Asian countries. The worsening crisis in Ukraine has led to soaring prices for basic commodities such as energy and food, which has led to serious debt payment difficulties for developing countries dependent on imports of commodities. base. In Sri Lanka, for example, rising world food and oil prices hit its balance of payments and led to a severe shortage of its foreign exchange reserves, forcing the country to suspend repayment of its external debt. Financial strains caused by the Russian-Ukrainian conflict have also pushed up financing costs for developing countries.

But despite facing relatively high debt pressures, Asian countries’ debt risks are generally contained. Asia still maintains a relatively high economic growth rate, and the international reserves of Asian economies are relatively sufficient. But active policies are still needed to defuse the risks of indebtedness.

First, it is important to balance short-term economic recovery with medium-term fiscal consolidation. Currently, some Asian countries are facing the twin pressures of slowing economic growth and rising inflation. Against the backdrop of successive interest rate hikes by the Fed, most Asian countries have also started to tighten monetary policy and relied on their fiscal policies to stimulate the economy, which could lead to a further rise in interest rates. public debt. To this end, once economic performance improves in the future, policymakers should undertake timely fiscal consolidation to avoid long-term fiscal deficits and ensure public debt sustainability.

Second, it is important to strengthen regional financial cooperation to ensure financial stability in Asia. The development of local currency bond markets in Asia should be further encouraged. By doing so, Asian countries can reduce their overreliance on external financing, reduce the risk of currency mismatches, and ease the debt burden caused by the appreciation of the US dollar. It is important to accelerate the development of the Asian credit rating system, improve procyclical rating methods for rating agencies and prevent rating agencies from amplifying debt risks and exacerbating cyclical fluctuations in the macroeconomics. The role of Asian regional financial agreements needs to be further strengthened in order to strengthen their capacities for economic surveillance, crisis prevention and resolution, and to maintain financial stability in Asia.

Third, Asian economies must work with the international community to resolve the debt problem. Solving the debt problems has always been an important part of the G20 agenda. Indonesia holds the rotating presidency of the G20 this year. Asian countries should actively participate in multilateral debt coordination with other countries and urge all parties to implement the G20 common framework for debt treatment beyond the debt service suspension initiative. the debt. International and regional financial institutions, such as the IMF and the World Bank, should also increase financial support to the countries concerned and actively reduce the debt burden of developing countries.

China has endeavored to help developing countries solve their debt problems. The country has launched and actively participated in the G20 debt service suspension initiative, offering the largest amount of debt suspension among G20 members. Meanwhile, relevant unofficial financial institutions in China have also taken debt suspension measures by referring to the terms of the debt service suspension initiative. In addition, China has successively waived interest-free loans from several least developed countries.

In the future, China and Asian countries can strengthen their cooperation in the following aspects to jointly solve the debt problem. The first aspect is to establish bilateral currency swap lines with countries that need to increase their foreign exchange reserves and prevent their sovereign credit ratings from being continuously downgraded, and to help them stabilize their economies and financial situations. The second aspect is to provide assistance and support in the form of loans to the countries concerned and to help them solve their balance of payments problems. The third aspect is to continue to strengthen cooperation with Asian countries within the framework of the Belt and Road Initiative to stimulate stable and sustained economic growth in the Asian region, which is the key to solving the problems of long-term debt.

The author is a research associate at the Institute of Global Economics and Politics, Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily. Opinions do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn