While it reached a record level of 91% of GDP at the end of 2019 for the non-financial sector in both developed and emerging market economies, household debt witnessed a sharp rise in emerging economies and a decrease in advanced economies, reaching 60% globally at the end of the year. 2019.
The crisis has reduced cash flows to the corporate sector, and the accompanying negative impact on employment rates, and thus increased household financing needs. The unprecedented monetary and fiscal policy support launched during the containment phase has eased market dysfunctions, eased financial conditions, and kept credit flowing to households and businesses.
However, it came at the expense of increasing levels of debt in most economies, as global non-financial corporate debt and owners’ debts increased by 11% and 5% of GDP, respectively, between the end of 2019 and the third quarter of 2020.
Sharp declines in production, especially in emerging markets, have also contributed to recent increases in debt levels and their ratio to GDP during the Corona crisis.
While fiscal easing policies are still required to support the recovery that is still in its infancy, it may result in an increase in the accumulation of financial leverage and exacerbate the risks of deteriorating economic activity in the future.
A study prepared by the Central Bank of Egypt showed that more flexible financial conditions are indeed linked to an increase in the leverage of the non-financial sector in the short and medium term. In all sample economies, it was found that easing financial conditions by one unit over three years is followed by an increase in non-financial corporate debt by 4% of GDP, and household financial leverage by 1.5% of GDP over three years.
In general, these results indicate that financial easing is associated with a faster accumulation of leverage, and that this correlation becomes stronger in times of high credit growth.
The study revealed that the risks of financial stability that are reflected in the risks of deteriorating economic activity in the medium term tend to be amplified due to financial facilitation policies and the rapid growth of financial leverage for both non-financial companies and households. So, policymakers need to remain aware of the risks of post-pandemic financial stability.
He stated that in light of the policy makers facing the necessity of a trade-off between continuing to limit the negative repercussions resulting from the epidemic or protecting against escalating financial stability risks in the future, macro-precautionary tools can be employed to overcome the negative effects and enhance flexibility, by targeting borrowers or lenders, as Borrowers eligibility measures can be implemented or liquidity limits targeted at banks.
The results also indicate that the macro-prudential tightening can help offset the deterioration in economic activity that may occur in the medium term associated with easing financial conditions. This indicates that macro-prudential policies play two important roles with regard to financial stability risks. First, tightening targeted measures help mitigate or even reverse the accumulation of financial leverage, especially during periods of credit boom.
A general tightening contributes to mitigating the trade-off, either by reducing downside risks directly or by countering the risks arising from financial easing when leverage grows rapidly.