- The number of countries that are at medium or high risk of spillovers from corporate debt defaults increased sharply last year.
- Economies ranked at medium risk from corporate distress spillovers increased from 25 in Q1 of 2022 to 38 in Q4 of 2022.
The rising corporate debt in emerging economies will put many countries into distress posing wider problems other than debt servicing according to the global lender.
In its recent financial outlook, the International Monetary Fund (IMF) notes that corporate debt rose by more than $12 trillion both in the advanced and developing economies.
“This is during the Covid-19 and post Covid period, when companies borrowed to strengthen their balance sheets and survive the economic shocks,” IMF says.
Further, according to the lender, the number of countries that are at medium or high risk of spillovers from corporate debt defaults and other forms of company distress increased sharply last year driven by the tightening of global financial conditions.
This it says, reversed a decline in risk seen in 2021 when policymakers raced to support stricken companies with cash and debt forbearance.
The number of economies ranked at medium risk from corporate distress spillovers increased from 25 in Q1 of 2022 to 38 in Q4 of 2022.
High risk ranked economies also increased from four economies in Q1 of last year to eight economies in the second quarter before declining by one in the third quarter.
The recent steep rises in interest rates and more expensive debt servicing on the back of weakening local currencies will further stretch firms’ finances, the lender adds.
For instance, the Kenyan Shilling has continued depreciating consequently against the US dollar, hitting a new low of 124.87 yesterday, posing much pressure on the country’s external debt.
It opened the year at 123.42 with the local currency shedding about 10 per cent of its value to the dollar year-to-date.
According to IMF and the World Bank, Kenya is currently at risk of high debt distress with the country’s debt-to-GDP ratio standing at 62.3 and 12.3 per cent above the recommended IMF threshold of 50.0 per cent for developing countries.
The lender therefore cautions nations from further tightening of financial conditions which would increase the risks faced by both advanced and emerging economies.
"Spillovers from corporate distress could include slower economic growth, rising unemployment, pressure on vulnerable households, volatile asset prices and a spike in non-performing loans at financial institutions," the lender says.