The Institute of International Finance (IIF) expects debt of emerging markets to surge as the economies of the G20 countries slow down while they mobilize $1.3 trillion annual funding to developing countries’ climate projects.

“Given the chronic underestimation of actual government spending needs in official public debt statistics, debt levels could rise even higher, particularly when accounting for the climate-related spending required to stay on track with net-zero targets and national climate commitments,” IIF said in its report.

IIF said emerging markets’ debt could contribute to a global debt of $170 trillion by 2028.

Combined with the growing need to fund mitigation and adaptation measures on climate change among developing countries, IIF said developed countries might demand less friendly rates as it expects economic growth of the G20 to moderate based on the International Monetary Fund’s (IMF) analyses.

IIF added the developed world might resort to higher interest rates as they are pressured to provide $1.3 trillion funding to less industrialized developing countries to help address climate change caused by massive carbon emissions from industries.

Tensions heighten

“Heightened trade tensions could undermine growth prospects and trigger mini boom-bust cycles in sovereign debt markets, particularly as inflationary pressures resurface amidst a potential escalation in supply-chain disruptions and tightening public finances,” IIF said.

“Emerging markets are expected to record a sharp build-up in external debt as global efforts to mobilize $1.3 trillion of external funding annually to emerging markets by 2035 gain momentum following COP29 in Baku,” it added.

Last month, the United Nations Climate Change Conference in Baku, Azerbaijan (COP29) ended with the announcement to deliver at least $300 billion per year in climate financing to developing countries by 2035 under the Baku Finance Goal.

The new fund commitment is three times bigger than the target in 2022. However, the minimum $300 billion funding is much smaller than the $1.3 trillion per year in climate finance the developing countries are demanding from developed countries.

“The Baku Finance Goal represents the best possible deal we could reach, and we have pushed the donor countries as far as possible. The science shows that the challenges will only grow. Our ability to work together will be tested,” Babayev said.