Global Debt Rises to $307tn in First Half of 2023 – IIF
The global debt pile increased by some $10 trillion in the first half of 2023, according to the Institute of International Finance (IIF) in its global debt monitor report. Global debt now stands at a new all-time high of $307 trillion, which is a staggering $100 trillion more than it was a decade ago, according to the report.
The Institute said in the report that over 80% of the debt build-up came from mature markets in H1 2023, with the U.S., Japan, the UK, and France registering the largest increases. In emerging markets, the rise has been more pronounced in China, India, and Brazil, it said.
IIF said after witnessing declines for seven consecutive quarters, the global debt-to-GDP ratio has resumed its upward trajectory in the first two quarters of this year, now hovering around 336%—up from 334% in Q4 2022.
The Institute said the sudden rise in inflation was the main factor behind the sharp decline in debt ratio over the past two years, allowing many sovereigns and corporates to inflate away their local currency liabilities.
“With wage and price pressures moderating – though not expected to return to target levels- we foresee the global debt ratio to surpass 337% by the end of the year”.
According to the report, the rise in debt ratios this year was more evident among governments and financial institutions. In contrast, prevailing macro headwinds, including tighter funding conditions, have led to a marked deceleration in bank credit expansion to households and non-financial businesses.
The report noted that in the U.S., the continued expansion of private credit markets has offered a buffer for those businesses that have faced more stringent bank lending standards following the U.S. regional banking stress earlier this year.
The household debt-to-GDP in emerging markets remains above pre-pandemic levels, largely due to China, Korea, and Thailand. In contrast, the household debt ratio in mature markets has dropped to its lowest level in two decades in H1 2023.
Should inflationary pressures persist in mature markets, the health of household balance sheets, particularly in the U.S., would provide a cushion for against further rate hikes, the IIF stated.
As international funding costs stabilize at higher levels, government debt in emerging markets (ex-China) has resumed its upward trend in H2 2022, registering a slight increase to 57% of GDP. This has coincided with a modest uptick in Eurobond issuance activity, the report stated.
Notably, Saudi Arabia, Poland, and Türkiye were the top borrowers from international markets, reflecting their substantial external borrowing needs. The report said in contrast, this year has seen a sharp decline in sovereign borrowing from domestic markets, with issuance trailing 20% behind last year.
However, given that interest expenses on local currency debt now make up over 80% of EM governments’ total interest costs, domestic government debt levels are at alarming levels in many countries.
Most worryingly, the global financial architecture is not adequately prepared to manage risks associated with strains in domestic debt markets; having a market-based framework to address unsustainable domestic debt levels could support initiatives to mobilize resources for development finance, including climate finance.
The prolonged weakness in international capital flows into EMs (ex-China), which has persisted for over a decade, remains a substantial challenge when seeking to mobilize much-needed international capital for climate action.
While the expansion of ESG debt markets has been encouraging for scaling up international capital, IIF thinks bridging large funding finance gaps depends on enhancing the capacity of multilateral development banks (MDBs) to crowd in private capital at scale without pushing countries further into debt.
“These efforts would be helped by strengthening the dialogue between countries and their investors to develop new projects, funding mechanisms, and mainstream best practices”, IIF said in the report. #Global Debt Rises to $307bn in First Half of 2023 – IIF