deteriorations in fiscal and current account balances, EMDEs entered the 2020 global recession with more vulnerable to external shocks than they were before the 2009 global recession.<sup>19</sup> This has left EMDE policymakers with less room than they had in 2007 to support domestic demand and activity in the event of future financial or economic stress (Figure 3).

In terms of external positions, on average, external debt in EMDEs increased sharply, to 57 percent of GDP in 2018 from 43 percent of GDP in 2007. Although still above 1990s averages, international reserves fell relative to external debt in more than two-thirds of EMDEs, and in some EMDEs more than halved, since 2007.

On average, EMDE fiscal surpluses of 2.4 percent of GDP in 2007 have turned into deficits of 2.7 percent in 2018. Because of the sharp decline in commodity prices, the deterioration has been particularly severe in commodity exporters, from a surplus of 3.5 percent of GDP in 2007 to a deficit of 3.3 percent of GDP in 2018. EMDE government debt has increased to 54 percent of GDP in 2018, from 45 percent of GDP in 2007; in more than one-third of EMDEs, government debt rose by more than 20 percentage points of GDP. Deteriorating public debt sustainability has also been reflected in sovereign credit rating downgrades. In some EMDEs, the share of nonresident holdings in local currency bond markets has grown to more than 30 percent, exposing these countries to the risk of sharp market displacements in the event of swings of global risk sentiment (Agur et al. 2018).

In LICs, average government debt relative to GDP in 2018 was less than the level in 2007. However, it has risen sharply, by 17 percentage points of GDP from a low in 2012 to 51 percent of GDP in 2018 (World Bank 2019b).<sup>20</sup> As a result, interest payments have absorbed a growing share of government revenues. Debt has been increasingly owed to nonconcessional and private creditors, heightening the vulnerability of LICs to financial market disruptions.

In non-LIC EMDEs, rapid credit growth fueled an increase in corporate debt, on average by 16 percentage points of GDP since 2007 to 50 percent of GDP in 2018. While the largest corporate debt increase (54 percentage points of GDP) occurred in China, several other EMDEs (Chile, Philippines, Turkey, United Arab Emirates) experienced increases in excess of 30 percentage points of GDP (Borensztein and Ye 2018; Ohnsorge and Yu 2016; Alfaro et al. 2017).

EMDE household debt increased on average by 5 percentage points of GDP since 2007 to 25 percent of GDP in 2018. In some EMDEs (Brazil, Chile, Colombia, Czech Republic, Malaysia,

> 19 There has been an intense debate about whether the rapid increase in debt is cause for concern, given historically low interest rates. Blanchard (2019) and Furman and Summers (2019) provide reasons for additional borrowing but Auerbach, Gale, and Krupkin (2019) caution against adding to debt. A detailed discussion on the benefits and costs of debt accumulation is provided in World Bank (2019a) and Kose, Ohnsorge, and Sugawara (2020).

> 20 Debt relief under the Heavily Indebted Poor Countries initiative and the Multilateral Debt Relief Initiative helped to reduce average public debt in LICs from a debt-to-GDP ratio of 115 percent in the early 2000s to 35 percent in 2012.

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