The world is sitting on a mountain of debt and this is worrisome but comes with some silver linings too. Over $15 trillion was added to the global debt mountain last year, bringing the total to a new record high of $313 trillion, writes eToro analyst for Romania, Bogdan Maioreanu.
This is equal to $39,000 per every person on the planet. But the good news is that the global debt-to-GDP ratio declined for a third consecutive year, largely driven by the evolutions in mature markets as inflation driven nominal economic growth more than offset this government debt build. Companies and households managed debt as income grew more than the debt and this was reflected in resilient consumption. The wide differences in global debt levels tell us a lot about the policy stakes ahead.
Japan has by far the world’s highest government debt level (see chart). This is one reason its policy interest rates have been negative for over 15 years and authorities pursued a yield curve control (YCC) policy. This will restrain how far the BoJ can go in raising the interest rates. But today, in a historic move, the Bank of Japan raised the interest rate by 0.1% ending the negative interest rate and the YCC policies. Since 2016, the BOJ has set short-term interest rates at minus 0.1 percent.
China has the world’s most indebted corporations. This was a driver of the authorities’ property market deleveraging crackdown started in 2021 with dramatic consequences for the market. And it remains as a caution on the potential side effects of an over-stimulating policy response to the current growth malaise. Emerging markets are mostly lowly leveraged, given their more limited financial options. But this also explains their resilience to the interest rates and US dollar surge.
Romania is somewhere in the bottom of the debt to GDP chart. But the dynamics of growth of the Government debt is showing that in 2019 the debt was around 35% while in 2020 due to the pandemic this figure jumped to almost 47% of the GDP. According to IMF data this amount is projected to reach almost 53% of GDP this year. Looking back at the dynamics of growth, we are seeing that in 2008, the debt was only 13% of the GDP. The global economic crisis made debt grow to over 30% in 2013 and furthermore to 40% in 2014 to stabilise and even decrease to 35% by 2019. This is showing how vulnerable Romania is to any global crisis and loans dependent and how important it is how the governments are using the borrowed money. According to the IMF the Romanian governmental debt will reach over 61% of the GDP by 2028.
Global debt is important especially in stressful economic times. In a world of debt, Europe’s consumers are some of the world’s least indebted. This explains in part the continent’s resilience through this economic downturn. But across the Atlantic, the US enjoys the unique exorbitant privilege of the dollar, and is the world’s largest economy. But its high and rising government debt levels are an increasing worry. With recent rating agency downgrades below AAA, large fiscal deficits despite the strong economy, there is little political willingness on either side of the aisle to address the issue.
But the global debt seas might not be as calm in the years to come. Favorable funding conditions between 2008 and 2022 enabled many governments and companies to borrow at a low cost. OECD estimates that around 40% of sovereign bonds and 37% of corporate bonds globally will mature by 2026, requiring further borrowing from the markets under higher interest rates. Even if inflation is brought down to central banks’ targets, yields will likely remain higher than when most of the debt was originally issued. This will lead to growing financing pressures, particularly in emerging economies where the amount of corporate bonds maturing in the next three years is significant, estimated at over USD 4.4 trillion.
For now individual investors are not seeing the rising government debt a concern for their investments according to the latest eToro Retail Investor Beat survey. Only 4% of the Romanian investors are declaring that they are worried about it. This figure is below the global average of the survey which sits at 5%, that is well behind the main concern – inflation mentioned by 24% of the investors.
