Future of Finance Forum 2024: Unprecedented global debt poses significant risks for emerging markets, says RBI Governor

Reserve Bank of India Governor Shaktikanta Das said on Friday that an alarming surge in global debt to unprecedented levels poses significant risks particularly for emerging market economies and low- to middle-income countries. These markets are increasingly vulnerable to financial instability, said the RBI Governor, speaking at the US-based Bretton Woods Committee’s Future of Finance Forum organised in Singapore.

Das highlighted that despite positive signals in the stock as well as bond markets over the past few months, the valuations of riskier assets appears to be at elevated levels, which can trigger a shock selling-like situation leading to financial stress. He pointed out that global debut has risen to $315 trillion, equivalent to 333 per cent of the global GDP in 2024. 

The dollar is looking strong at the current juncture amid hopes of rapid reductions in benchmark interest rates but it can pose a negative impact on emerging markets, he pointed out. 

Hence, it can become more expensive for such countries to repay their debts, which can not only trigger a financial crisis but also cause inflation to worsen, Das. 

"Many non-bank financial institutions (NBFIs) are quite large and complex... Sometimes, these NBFIs have hidden debts and financial issues that can trigger alarm bells for larger institutions," he added. 

"At these levels, the debt overhang poses significant spillover risks to EMEs. In particular, the low income and some middle-income countries are very vulnerable. Coexistence of high levels of debt and elevated interest rates can feed a vicious cycle of financial instability through impairment of government and private-sector balance sheets," said the RBI Governor, highlighting that the current fiscal landscape is further complicated by rising fiscal deficits, which are now higher than pre-pandemic levels.

He also pointed out that with 88 economies entering election cycles in 2024, the scope for fiscal consolidation appears limited.

This makes it crucial for countries to manage their debt effectively to avoid exacerbating financial risks, he said. 

"Such a scenario is filled with potential to create a protracted period of economic fragmentation and reduced global growth. Revival of multilateralism and coordinated policy action can mitigate the severity of this situation," Das added.