Debt-servicing capacity remains a challenge in emerging markets even after the Covid-19 pandemic, with rising cost and deteriorating external vulnerability.
Central and eastern Europe are better positioned than Latin America or Asia while Africa and the Caribbean are most vulnerable, according to Moody’s Investors Service.
Tightening financial conditions are a key risk for many emerging markets, it says.
However, despite an uptick in defaults, policy support prevented a debt crisis in emerging markets, but the pandemic and its aftermath will challenge their debt-servicing capacity.
However, low interest rates will support debt-servicing capacity in advanced economies, it says.
The global debt has risen faster than the previous recession cycles to US$32 trillion (RM132 trillion) in 2020. This was led by government and non-financial corporate debt.
Advanced economies have more fiscal space but will face productivity and demographic challenges, according to the report.
The pandemic will set back progress in terms of social goals and add to existing challenges in many countries, such as slower growth, lower investment, dependence on volatile commodity prices and vulnerability to climate shocks.
Recovery will be staggered across countries. The United States will lead the recovery, while services-dependent southern European economies will lag behind.
Banking systems are generally more resilient following a decade of balance-sheet strengthening. However, higher debt levels and more relaxed underwriting will add to banks’ asset risks, says the report.