The post-pandemic rebound in world growth and inflation last year meant the amount of debt sloshing around the global economy saw its first annual fall in dollar terms since 2015, a widely tracked study has shown.
The Institute of International Finance report published on Wednesday estimated that the nominal value of global debt declined by some $4 trillion, bringing it fractionally back under the $300 trillion threshold breached in 2021.
With borrowing costs on the rise, particularly for emerging markets, the retrenchment was driven entirely by wealthier countries though, which as a group saw total debt decline roughly $6 trillion to $200 trillion.
In contrast, the amount of developing world debt hit a new record high of $98 trillion with Russia, Singapore, India, Mexico, and Vietnam seeing the largest individual rises.
Stronger economic activity and higher inflation meanwhile, both of which erode debt levels, saw the global debt-to-GDP ratio drop over 12 percentage points to 338% of GDP, marking the second annual drop in a row.
Again, though, the improvement was driven by developed markets which saw an overall 20 percentage points fall to 390%. The emerging market debt ratio rose by 2 percentage points meanwhile to 250% of GDP, largely driven by China and Singapore.
Breaking the numbers down further, the IIF, a global banking trade group, estimated that the emerging market government debt-to-GDP ratio climbed to almost 65% of GDP in 2022 from just under 64%.
“The external public debt burden of many developing countries worsened due to sharp losses in local currencies (in 2022) against the dollar.” the IIF said, adding that it had pushed international investor demand for local currency EM debt to multi-year lows, “with no sign of imminent recovery”.
Investment bank JPMorgan had a different take on the global debt situation, highlighting in an analysis published on Wednesday that despite last year’s modest falls in developed market debt, the rise since the global financial crash fifteen years ago has been nothing short of explosive.
Graphic: Changing debt levels
DEBT STABILITY? FORGET ABOUT IT
JPMorgan calculated that developed market public sector debt as a share of GDP has surged to 122% from 73% just before the crash and by over 30 percentage points of GDP in 13 of 21 major economies and over 45%-pts in nine of them.
What makes the nearly 50%-point jump even more remarkable is that debt had risen just 40 percentage points in the 40 years leading up to the financial crisis — a period that also had significant shocks, including stagflation in the 1970s and a fiscal spending boom in the 1980s.
“The step-change in debt in just 15 years raises questions of sustainability,” JPMorgan’s analysts said, pointing to the chaos already seen in UK financial markets when the short-lived Liz Truss government floated unfunded tax cut plans.
Based on a debt sustainability framework, they also estimated that primary balance – net lending excluding interest – of developed markets would need to improve 3.8%-points on average from its current level of -3.4% of GDP just to keep debt from rising.
Debt stability in the United States requires a bigger 4.4%-point tightening in policy while in Japan, which has by far the highest debt levels among major economies, the hurdle is a much higher 9%-points.
Should the developed market as a whole wish to reduce debt to the levels seen before the crisis, the nearly 40%-point reduction in debt to GDP levels would require a primary lending surplus of 4.3% for 10 years — a huge fiscal tightening of 7.7%-points to be maintained for a decade.
“Debt stability? Forget about it,” JPMorgan’s analysts said.