The IIF has warned that government debt strains could be a concern for developing countries if there is a potential dollar rally caused by rising US inflation and delayed Federal Reserve rate cuts. Despite households in the country making efforts to pay off personal loans and credit cards, government budget deficits remain high and are expected to contribute significantly to global debt accumulation this year.
The International Monetary Fund (IMF) has advised governments worldwide to exercise fiscal restraint and avoid cutting taxes or increasing spending ahead of what it called the “biggest-ever election year.” The IMF banking lobby group also raised concerns over rising trade frictions and geopolitical tensions, warning that these factors could impede the external debt servicing capacity of emerging markets grappling with high levels of dollar-denominated debts.
Despite a relatively positive near-term global economic outlook, stubborn inflation in the US continues to pose a significant risk, leading to higher global funding costs. Additionally, escalating trade disputes and geopolitical conflicts could create challenges for debt markets. As China aims to dominate the clean energy technology sector, supply chain disruptions fueled by protectionist policies may keep inflation and interest rates elevated, hampering trade and investment flows and further reducing the ability of emerging and frontier markets to service external debt.
