Developing-world debt topped 250% of GDP amid virus stimulus

The global debt has skyrocketed to an all-time high of US$281 trillion at the end of 2020, or more than 355 per cent of global gross domestic product (GDP).

This latest state of affair highlights the fact that the world has never been more indebted after a year of battling COVID-19. The Institute of International Finance, which assessed the world’s debt situation, is arguing that there is even more borrowing ahead in 2021 and beyond.

The data, according to the Institute of International Finance shows that governments, companies and households raised US$24 trillion last year to offset the pandemic’s economic toll. The Washington-based institute states that countries and companies may have little choice but to keep borrowing in 202.

The institute’s Director of Sustainability Research, Emre Tiftik and Economist, Khadija Mahmood contends that governments with big budget deficits are set to increase debt by another US$10 trillion this year, as political and social pressures make it hard to curb spending, pushing this group’s debt load past $92 trillion by end-2021.

Even as vaccines are rolled out, low central bank policy rates are keeping issuance above pre-pandemic levels. Tiftik made the point that the most important challenge facing the world is to find a well-designed exit strategy from these extraordinary fiscal measures.

Mature and emerging markets searching for a balance

Both mature and emerging markets are being forced to search for a perfect balance. While an economic recovery may lead some governments to start developing strategies to roll back stimulus, analysts have argued that doing so too soon could magnify default and bankruptcy risk.

However, waiting too long could lead to unwieldy debt loads. Even amid historically muted credit spreads, global debt markets have started selling off, pushing up sovereign yields. Last week long-term U.S. Treasury yields reached the highest in about a year.

The data shows that increases in non-financial industry debt-to-GDP ratios in France, Spain and Greece were among the sharpest in mature economies, as governments rapidly ramped up borrowing. In addition the data indicates that in emerging markets, China saw the biggest jump in debt ratios last year, followed by Turkey, Korea and the United Arab Emirates.

Among the findings of the Institute of International Finance are as follows:

• Non-financial corporates are becoming more reliant on government support, which may exacerbate pre-existing vulnerabilities.
• Financial corporates had the biggest annual jump in debt ratios in over a decade. It was the first year-over-year rise since 2016.
• In emerging markets, South Africa and India had the biggest increases in government debt ratios last year; Corporate debt accumulation was greatest in Peru and Russia.
• Foreign-currency debt in the developing world lingered near US$8.6 trillion in 2020 “as sharp losses in EM currencies reduced firms’ incentives to borrow in foreign currency”.