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World Bank warns on risk of private debts to poor nations

World Bank’s surveys showed 46 per cent of businesses in developing countries are expected to fall behind on debt payments.  [Courtesy]

Developing countries must quickly strengthen their financial sectors, the World Bank has said, warning that risks were rising along with inflation, interest rates and lack of transparency about sovereign and private debts.

The World Bank underscored its longstanding concerns about lack of transparency about Chinese lending and collateralised loans in the sovereign debt sector but also called outgrowing private sector risks in its latest World Development Report.

The bank’s surveys showed 46 per cent of small and medium-sized businesses in developing countries expected to fall behind on debt payments within six months, but the number was twice as high in some countries, chief economist Carmen Reinhart told Reuters in an interview.

Ms Reinhart said she was keeping a close eye on private sector debt developments in bigger emerging markets like India, South Africa, the Philippines, and Kenya, where more than 65 per cent of small and medium-sized companies are expected to be in arrears.

And on the sovereign side, Turkey, whose credit rating was downgraded to “BB-” by rating agency Fitch last week, had been in crisis for several years and could “well be the straw that broke the camel’s back,” she said.

She said massive fiscal and monetary support, coupled with moratoriums on bank loans and generous forbearance policies, had mitigated the economic crisis triggered by the Covid-19 pandemic, but the consequences were now “coming home to roost” for households and firms.

“There’s a huge need for better transparency on the private sector debt,” Reinhart said.

The share on non-performing loans had remained below what was feared at the start of the pandemic, but Reinhart said forbearance policies and relaxed accounting standards could be obscuring a “hidden non-performing loan problem.”

“What gets you, in the end, is not so much what you see, but what you don’t see,” she said, warning against complacency about the financial health of households and firms.