At over 322% of GDP, global debt is now 40 percentage points ($87 trillion) higher than at the onset of the 2008 financial crisis—a sobering realization as governments worldwide gear up to fight the pandemic.
As social distancing becomes the norm across most mature economies, global recession looms: a recession which would begin with $87 trillion more in global debt than at the onset of the 2008 financial crisis, Institute of International Finance says.
With a sharp contraction in corporate earnings and mounting job losses already exacerbating the debt service burden for businesses and households, the aggressive fiscal response has already fueled a massive wave of government borrowing in many countries.
Gross government debt issuance hit an all-time monthly record of over $2.1trn in March ($3.2 trillion including other sectors).
Using a simple top-down estimation, if net government borrowing doubles from 2019 levels—and there is a 3% contraction in global economic activity (nominal terms)—the world’s debt pile would surge from 322% of GDP to over 342% this year.
Hence while remarkable uncertainty around the scale and duration of the pandemic makes point estimates challenging, a sharp upward trajectory in debt levels looks all but certain.
Much of course depends on the extent to which the virus is contained and treated, and how well the fiscal policy response can support the most vulnerable segments of the economy—particularly small and medium-sized enterprises (SMEs) and low-income households.
How firms and households react to these bold policy measures—and what behavioral changes may ensue—will make a big difference to recovery prospects.
Moreover, beyond short-run disruptions, widening fiscal deficits and massive expansion in money stock could revive inflationary pressures.
While this should ease debt burdens, the impact on prices will likely be quite different across countries, particularly between emerging and mature economies.
Finding the right exit strategy could be even more challenging this time around.
Highly accommodative monetary and fiscal policy are essential to mitigate liquidity and solvency risks, but prolonged ultra-loose policies could result in still greater debt imbalances and wealth/income inequality.
Global debt hit a new record high of $255 trillion in 2019.
Following a moderate rise of $3.3 trillion in 2018, the pace of debt accumulation was much faster at over $10.8 trillion in 2019 (Table 1).
Now topping 322% of GDP, global debt is 40 percentage points higher than in 2007.
Debt outside the financial sector topped $192 trillion in 2019, up from $183 trillion in 2018.
The bulk of the increase was in the general government (up $4.3 trillion) and non-financial corporate sectors ($2.8 trillion).
Emerging markets added over $3.4 trillion to the global debt mountain last year, with total EM debt exceeding $71 trillion.
This has brought the EM debt-to-GDP ratio to a fresh high of 220% of GDP, up from 147% in 2007.
Governments have accounted for the lion’s share of the rise in global debt since 2007—from less than $35 trillion to $70 trillion in 2019.
While the U.S. and China accounted for over half of this increase, over 85% of the 52 countries in our sample now have higher government debt-to-GDP ratios than before the 2008 financial crisis.
Of note, Spain, the UK, Japan, France, Italy, and the U.S. have all seen a surge over 40 percentage points.
Across emerging markets, the rise has been over 25 percentage points in South Africa, Chile, Brazil and Argentina while Turkey and India saw a modest drop (Chart 2).
Household debt now tops $48 trillion, up from $35 trillion in 2007.
Switzerland, Denmark, Norway, Canada, Netherland have the world’s most indebted household sectors relative to GDP (Table 2).
The build-up in household debt has been sharpest in China (up 35%pts) and Norway (up 30%pts) since 2007.
Non-financial corporate debt has surged over 70% since 2007 to near 92% of GDP ($74T).
Non-financial corporate debt-to-GDP ratios are at or near record levels in Canada, Chile, France, Philippines, Singapore, South Africa, Switzerland, UAE and the U.S.
With high-debt corporate sectors facing serious refinancing risks, firms with limited cash buffers are highly sensitive to prolonged disruption, particularly if a V-shaped recovery fails to materialize (Chart 3).
Emerging market FX debt tops $5.3 trillion, accounting for over 8% of total EM debt outside the financial sector (Chart 4).
Argentina, Turkey, Chile and Colombia have seen the sharpest build-up in FX debt since 2009.
Heavy reliance on FX debt represents a significant liquidity and solvency risk for some EM corporates and sovereigns, while leaving them more exposed to sudden shifts in global risk appetite.
Refinancing alert: over $20 trillion of bond and loans come due through end-2020; EM debt accounts for 23% of the total.
Total EM FX refinancing needs amount to some $730 billion through end-2020—over 80% of that in USD, helping explain growing calls for debt relief. ■