Director of IMF’s monetary and capital markets division Tobias Adrian, told newspersons late this week that the high debt level in corporate sector followed by lack of regulatory measures is very worrying. He stated that these types of vulnerabilities can have disastrous implications on the world markets in case there is an economic shock like a recession. During the recent IMF’s Spring Meetings he stated that IMF is worried about risky behavior in corporate world like high loan leverage, shaky underwriting standards and deteriorating pockets in some sectors that could be exposing them to unseen dangers.
The federation stated in its recent Global Financial Stability report that in recent years the vulnerability of corporate sector has become elevated in countries which are important to world economy and contribute to 70 percent to its growth. As per details given by Institute of International Finance the ratio of corporate debt against GDP towards end of last year was at 73 percent which is close to figures that existed during the financial crisis period. IMF also revealed that corporates from non-finance sectors were the biggest contributors to growth in debt levels across emerging market regions in 2018.
After the financial crisis corporate debt had grown exponentially due to easy availability of credit that provided better returns when compared to government bonds which in general is considered safer than others. Corporates have therefore moved towards increasing their debt levels for every expansion plan and investment like buying their own stock back from the market. David Malpass, president of World Bank also told that the chief reason for extensive debt floating around the market is China. As the economy in that country is slowing down its authorities are easing credit conditions on every opportunity to stimulate growth which has led to soaring corporate debt. Both Nomura Bank and DBS Bank of Singapore have told that defaults on corporate bonds of China issued on USD and Chinese Yuan have risen during 2018.