Global debt levels could soar to almost 350 per cent of GDP in 2020 as governments borrow furiously to stave off economic disaster, according to new Institute of International Finance (IIF) figures.
Based on conservative assumptions of net sovereign debt issuance of double the 2019 level and a 3 per cent nominal decline in global economic activity, the IIF report says “the world’s debt pile would surge from 322% of GDP to over 342% this year”.
“With the COVID-19 fiscal response in full swing, the global debt burden is set to rise dramatically in 2020; gross government debt issuance soared to a record high of over $2.1 trillion last month, more than double the 2017-19 average of $0.9 trillion,” the IIF paper says.
“… 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.”
The 2020 splurge follows a borrowing blow-out last year that saw total global debt pile up at more than triple the 2018 rate of US$3.3 trillion. Last year the world accumulated over US$10.8 trillion in borrowings on a rising tide of optimism, bringing total global debt to US$255 trillion as at December 31, 2019.
“Debt outside the financial sector topped $192 trillion in 2019, up from $183 trillion in 2018,” the IIF study says. “The bulk of the increase was in the general government (up $4.3 trillion) and non-financial corporate sectors ($2.8 trillion).”
Financial sector debt, however, has declined slightly relative to 2007 with total borrowings of over US$80 trillion compared to US$90 trillion or so 12 years previously.
The rapid increase in debt since the global financial crisis (GFC) more than 10 years ago has left world balance sheets in a precarious position as another major downturn threatens, the report says.
Global debt to GDP is now 40 per cent higher than in 2007, just prior to the GFC.
“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,” the IIF paper says.
Some US$20 trillion plus of bonds fall due before the end of 2020, presenting refinancing risks, especially in emerging market (EM) countries that issued debt denominated in US currency.
“EM debt accounts for 23% of the total [maturing bonds in 2020],” the study says. “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.”
Ultimately, the government and central bank spew of liquidity into economies could “revive inflationary pressures”, the report says, once short- to medium-term volatility subsides.
However, 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,” the IIF paper says. “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.”
The report was authored by IIF staff Emre Tiftik, director sustainability research, and Khadija Mahmood, associate economist.
IIF represents the interest of 450 members (mainly banks) in 70 jurisdictions.