Rise in Global Interest Rates – Challenging for Many Economies

Sharp rises in global interest rates, according to the IMF Blog, could cause corporate distress and wider problems for many economies.

According to the paper, Authored by Burcu Hacibedel and Ritong Qu, corporate debt in advanced and emerging economies increased by more than $12 trillion during the pandemic as companies borrowed to strengthen their balance sheets and weather the economic shock. Firms’ finances are being stretched as interest rates rise sharply and debt service becomes more expensive.

This increase in corporate risk, as well as a doubling of funding costs for even the safest issuers, could pose serious problems for many economies and financial systems. Based on lessons learned from previous crises in 55 advanced and emerging economies since 1995, an IMF staff-developed machine-learning model predicts the likelihood of corporate distress escalating into systemic economic risk.

According to the blog, Thirty-eight economies tracked by the IMF early-warning model are at medium risk of systemic corporate distress, while seven economies, mostly in Europe and Asia, are at high risk.

More countries are at greater risk than they were before the pandemic. The proportion of large economies classified as high risk has increased, with high-risk countries accounting for 21% of global GDP in the third quarter of 2022, up from 1% at the end of 2019.

Only nine economies are considered low risk.

Following a sharp increase in 2020-21, non-financial company international debt issuance fell by $136 billion in the year to June 2022 as firms found it more expensive to access finance.

Countries with failing or likely failing companies should develop effective insolvency systems and facilitate market-led restructuring of heavily indebted firms in order to contain systemic risks.

Secondly, countries should maintain macroprudential and microprudential policies that target high-risk industries and borrowers.

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