In a recent report, Moody’s said that debt accumulation can finance development and the growth process in such economies. However, historically, this is often followed by financial and debt crises.

“The balance of risks depends on how the debt is used, country characteristics and the economic cycle, financial conditions, and financial market development,” Moody’s explained.

Regarding bond markets in emerging economies — as debt investment instrumentsmeasured by percentage of GDP — the report showed that they have grown three times faster on average than mature bond markets, reaching 80 percent of GDP in 2020, up from the 15 percent posted in 2000.

Meanwhile, the report indicated that domestic bond markets in these economies are much larger than international bond markets and are expanding alongside bank lending, registering 65 percent of GDP on average across large emerging economies, compared to 17 percent for international bond markets.

In this respect, the report showed that 18 major emerging economies had a total of $27 trillion in domestic and international bonds outstanding in 2020.

Moreover, bank lending has expanded alongside bond financing in those economies, with the share of bank lending remaining steady at about 71 percent of total credit.

Moody’s expected emerging economies’ default rates to drop in 2021, however, medium-term debt vulnerabilities are rising, leaving these economies increasingly exposed to shifts in financial market conditions and risks to the economic recovery amid the ongoing COVID-19 pandemic.

Debt in emerging markets and developing economies (EMDEs) is at its highest level in half a century amid the ongoing pandemic crisis, according to the World Bank’s update on debt positions in such economies, which was released in September.

“In about nine out of 10 EMDEs, debt is higher now than it was in 2010 and, in half of the EMDEs, debt is more than 30 percent of the gross domestic product higher. Historically, elevated debt levels increased the incidence of debt distress, particularly in EMDEs and particularly when financial market conditions turned less benign,” according to the World Bank.