Line graph of total debt as a percentage of GDP, showing that global debt increased during the pandemic

Pandemic drives global ‘debt tsunami’

Global debt rose at an unprecedented rate in the first nine months of the year as governments and corporations launched a “debt tsunami,” according to new research in the face of the coronavirus crisis.

The pace of debt accumulation will struggle for the global economy to reduce borrowing in the future without “having a significant adverse impact on economic activity,” the Institute of International Finance warned on Wednesday.

Total debt has increased $ 15 billion this year and is on track to exceed $ 277 billion in 2020, said the IIF, which represents financial institutions. Total debt is expected to reach 365 percent of global gross domestic product by the end of the year, up from 320 percent at the end of 2019.

The debt burden is particularly high in emerging markets, as it has risen by 26 percentage points to 250 percent of GDP so far this year, according to the IIF. The proportion of emerging market government revenue spent on repayments has also risen sharply this year, according to IIF data.

This week, Zambia became the sixth developing country to default or restructure debt in 2020. More outages are expected as the cost of the pandemic rises.

The G20 group of the world’s largest economies has launched an initiative that has so far enabled 46 of the world’s poorest countries to delay approximately $ 5 billion in debt payments due this year. They are also seeking to free up additional IMF funding for poorer nations.

However, analysts said further action was needed to stem the rising risk of a financial crisis in a large number of developing countries.

Luis Oganes, head of emerging markets research at JPMorgan, said emerging markets are at risk of rising inflation if they try to monetize debt by buying their own bonds, as some have done this year, or deflation when they let the debt rise too high.

“Large debt will lead to zombie banks and zombie companies that will limit growth,” he said.

Since the pandemic began, leading central banks have cut interest rates and pumped monetary policy stimulus into the global economy, which has helped lower borrowing costs around the world. Even so, collapsing tax revenues have made servicing emerging market debts much more difficult.

The IIF estimates that emerging market borrowers will have to pay back approximately $ 7 billion in debt by the end of next year, approximately 15% of which is in US dollars, exposing borrowers to the risk of currency fluctuations.

Emre Tiftik, IIF director of sustainability research, said debt rose much faster than expected at the beginning of the crisis.

From 2016 to the end of September, global debt increased by $ 52 billion. This is comparable to a $ 6 billion increase between 2012 and 2016. The pace of global GDP growth barely changed over that period until the outbreak of the pandemic sparked a historic recession.

Line graph of the share of government revenue devoted to public debt servicing (%) showing that debt servicing costs in emerging markets have increased

The change in debt – without a corresponding change in the pace of output growth – “suggests that GDP-generating debt capacity is declining significantly,” Tiftik said. “Aggressive support measures will remain with us for some time and will inevitably increase the debt considerably.”

The rise in emerging market debt was driven by a surge in non-financial corporate debt in China, bringing total emerging market debt to $ 76 billion. Excluding China, the US dollar value of debt in other emerging markets declined this year, reflecting the falling value of local currencies against the dollar.

Mr Tiftik said financial institutions had tried to “build buffers against the Covid shock”. “A significant portion of their new debt has been directed to customers, which has been very useful in absorbing the initial shock of the crisis,” he said.

Debt in advanced economies rose more than 50 percentage points that year, reaching 432 percent of GDP by the end of September. The United States accounted for almost half of this; Debt is projected to hit $ 80 billion this year, up from $ 71 billion in late 2019.

Modified this article to correct a graph showing global debt as a percentage of GDP