$255tr world debt pile set for shock surge

The world's debt pile, which hit a record high of $255 trillion in 2019, accounting for over 322 per cent of the worldwide GDP, is poised to surge exponentially to over 342 per cent this year, the Institute of International Finance revealed on Tuesday.
The terrific debt pile works out at around $32,500 for each of the 7.7 billion people on planet and more than 3.2 times the world's annual economic output, but the staggering numbers don't stop there as the world grapples with one its starkest pandemic challenges, analysts said.
"Hence 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 IIF said.
"With the Covid-19 fiscal response in full swing, the global debt burden is set to rise dramatically in 2020 as gross government debt issuance soared to a record high of over $2.1 trillion in March, more than double the 2017-19 average of $0.9 trillion," said Emre Tiftik, Director, Sustainability Research at the IIF.
The World Bank has highlighted the risk of a fresh global debt crisis after warning of the biggest buildup in borrowing in the past 50 years.
In its half-yearly Global Economic Prospects (GEP), the Washington-based organisation said of the four waves of debt accumulation since the 1970s, the latest was the largest, fastest and most broad-based.
The World Bank, which provides loans and grants to developing and emerging economies to help tackle poverty, said there could still be a financial crisis even though historically low interest rates were making debts more manageable.
With a sharp contraction in corporate earnings and mounting job losses already exacerbating the debt service burden for businesses and households, the aggressive fiscal response has already fuelled a massive wave of government borrowing in many countries, Tiftik said.
Warning that such an exacerbated debt level must be a sobering realisation as governments worldwide gear up to fight the pandemic, the director of the Washington-based global body said following a moderate rise of $3.3 trillion in 2018, the pace of debt accumulation was much faster at over $10.8 trillion in 2019 alone.
The IFF said in its Debt Monitor report that global debt outside the financial sector topped $192 trillion in 2019, up from $183 trillion in 2018. "The bulk of the increase was in the general government (up $4.3 trillion) and non-financial corporate sectors ($2.8 trillion). Emerging markets added over $3.4 trillion to the global debt mountain last year, with total EM debt exceeding $71 trillion," it said.
"This has brought the EM debt-to-GDP ratio to a fresh high of 220 per cent of GDP, up from 147 per cent in 2007. Governments have accounted for the lion's share of the rise in global debt since 2007-from less than $35 trillion to $70 trillion in 2019," said Khadija Mahmood, Associate Economist at the institute.
While the US and China accounted for over half of this increase, over 85 per cent of the 52 countries in the IIF's sample now have higher government debt-to-GDP ratios than before the 2008 financial crisis, it said.
Of note, Spain, the UK, Japan, France, Italy, and the U.S. have all seen a surge over 40 percentage points. Across emerging markets, the rise has been over 25 percentage points in South Africa, Chile, Brazil and Argentina while Turkey and India saw a modest drop. Household debt now tops $48 trillion, up from $35 trillion in 2007. Switzerland, Denmark, Norway, Canada, Netherland have the world's most indebted household sectors relative to GDP.
The build-up in household debt has been sharpest in China (up 35 per cent pts) and Norway (up 30 per cent pts) since 2007.
Non-financial corporate debt has surged over 70 per cent since 2007 to near 92 per cent of GDP ($74 trillion). Non-financial corporate debt-to-GDP ratios are at or near record levels in Canada, Chile, France, the Philippines, Singapore, South Africa, Switzerland, the UAE and the US. With high-debt corporate sectors facing serious refinancing risks, firms with limited cash buffers are highly sensitive to prolonged disruption, particularly if a V-shaped recovery fails to materialise.
- issacjohn@khaleejtimes.com