Global debt at record high, fragmentation may push it even higher

$307.4 trillion in debt in the third quarter of the year
Global debt at record high, fragmentation may push it even higher
Servicing debt was consuming an increasing chunk of revenues worldwide

Global debt rose to a record high of $307.4 trillion in the third quarter of the year. Meanwhile, the debt-to-GDP ratio in emerging markets reached an all-time high.

These numbers were reported by the Institute of International Finance (IIF) on Thursday evening in a report titled “Global Debt Monitor: Politics and Climate Finance in a High-Debt World”.

The report estimated that global debt would reach $310 trillion by the end of the year, an increase of more than 25 percent in five years. Moreover, the report warned that the shift towards political populism may push debt even higher next year.

Emre Tiftik, director of sustainability research at the Institute, noted that more than 50 elections are coming in 2024. This includes the United States, India, South Africa, Turkey and Pakistan.

Debt servicing has reached alarming levels

“In the face of increasing political polarization and heightened geopolitical tensions, these forthcoming elections might pave the way for populist policies,” he said. He added that it could increase government borrowing and spending, and loosen fiscal discipline.

“This can create further volatility in the markets,” Tiftik said in a press briefing to present the report.

He also warned that servicing debt was consuming an increasing chunk of revenues worldwide. Specifically, it had hit “alarming” levels in Pakistan and Egypt.

In the United States, government interest expenses are projected to hit 15 percent of revenue by 2026. That is an increase from less than 10 percent currently.

Two-thirds of the debt increase in the fourth quarter of last year came from developed markets. Specifically, markets that are led by the United States, Japan, France, and the United Kingdom. As for emerging markets, China, India, Brazil, and Mexico, they also achieved sharp increases.

Meanwhile, the global debt-to-GDP ratio was slightly changed at a staggering 333 percent. Moreover, it stood at 255 percent in emerging markets, 32 percent higher than the same period five years ago.

Largest increase in government debt

The IIF stated that government debt saw its largest increase in the third quarter. The budget deficit also remains well above pre-pandemic levels in many countries.

The report noted that sovereign debt in default hit a record high above $554 billion through the end of 2022. Roughly half of this debt is bonded debt.

The IIF warned that the debt burden on households and businesses continues to rise in major economies. This includes China and the United States. Thus, it has ramifications for everything from elections to the clean energy transition.

Read: Economists project 2.6 percent global GDP growth, surpassing expectations

Prospects for climate finance are at risk

“With firms’ borrowing appetite at multi-year lows amid still-tightening funding conditions and heightened geo-economics fragmentation, the prospects for climate finance look increasingly at risk in recent quarters, as evidenced by a marked slowdown in ESG debt issuance,” it said.

The International Monetary Fund recently stated that China played a key role in increasing global debt in recent decades. Thus, its borrowing exceeded economic growth. Debt-to-GDP has risen to roughly the same level as the United States, but in dollar terms China’s total debt is $47.5 trillion. That is still much lower than that of the United States which recorded a total of about $70 trillion. As for the debt of non-financial companies, the rate of 28 percent in China is the largest in the world.

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