Recent global trends are pointing towards strengthened economic activity in the developed world and in several large emerging countries. Nevertheless, UN DESA’s Development Policy and Analysis Division (DPAD) cautioned that several risks are clouding the growth prospects, particularly for the emerging economies.

According to the division’s latest World Economic Situation and Prospects (WESP) monthly briefing, the emerging economies remain highly susceptible to shocks, amid persistent structural weaknesses and uncertainty in the international policy environment.

Low commodity prices have continued to weigh on investment growth in large commodity exporting countries, including Brazil, Chile and the Russian Federation. Meanwhile, high political uncertainty is weighing on investor sentiments in economies such as Brazil, South Africa and Turkey.

Importantly, many emerging economies, including China and the Republic of Korea, are facing growing financial sector vulnerabilities, mainly arising from high debt levels.

Against this backdrop, the United States Federal Reserve (Fed) raised its key policy rate again in June and announced plans to gradually reduce the size of its balance sheet. As global financial conditions tighten, corporates will face higher borrowing costs, weighing on their capacity to increase investment.

For the emerging economies, high corporate leverage also poses a risk to financial stability. Recent data from the Bank for International Settlements showed that corporate debt of non-financial emerging market corporates increased from 60.7 per cent of GDP in 2008 to 102.1 per cent of GDP in 2016.

The fragility of corporate balance sheets in several emerging economies has also been exacerbated by the rise in dollar-denominated debt post-crisis. Given that an increase in interest rates in the United States will support the continued broad-based strength of the dollar, this raises debt servicing costs and currency mismatch risks for corporates as well as governments that have high dollar debt burden.

The renewed decline in global crude oil prices further adds to the vulnerabilities in several commodity-dependent economies, particularly in Africa, Latin America and Western Asia. Persistent weakness in commodity-related revenue will adversely affect the fiscal and corporate sectors, which may in turn have negative spillovers to the banking sector as banks face a deterioration in asset quality.

In this environment, policymakers need to remain focused on efforts to mitigate rising financial imbalances and to enhance resilience to shocks. Importantly, the emerging economies need to progress further on structural reforms.

Countries with more diversified structures and strong financial systems, healthy fiscal and external positions, low debt levels and ample policy buffers are better prepared to withstand periods of sudden adjustments in global financial markets.