IIF report says over $16 trillion was erased from global stock markets this year due to continued borrowings and the Russia-Ukraine war
Global debt surged to a record $305 trillion in the first three months of this year as the US and China, the world’s two largest economies, continued to borrow amid slowing economic growth exacerbated by Russia’s war in Ukraine.
The global debt-to-GDP ratio declined for the fourth consecutive quarter in the first three months of this year. The drop was more evident in mature markets, the Institute of International Finance (IIF) said in its Global Debt Monitor report.
Although global debt was largely driven by $2.5 trillion and $1.8 trillion borrowings by China and the US, respectively, in the euro area it declined for the third consecutive quarter.
“As the ripple effects of the Russia-Ukraine war continue to disrupt global economic activity, [economic] growth is expected to slow significantly this year, with adverse implications for debt dynamics,” IIF said in its report.
“On the back of strict lockdowns in China and tighter global funding conditions, the anticipated slowdown will likely limit or even reverse the downward trend in debt ratios.”
The surge was underpinned by corporate sector borrowings — excluding financial institutions ― and general government borrowing, with debt outside the financial sector now topping $236 trillion — nearly $40 trillion higher since the onset of the pandemic. Cumulative debt in emerging markets is now approaching a record $100 trillion, the IIF said.
The inflation outlook will also play a role in global debt and will continue to help reduce debt ratios in general. “As central banks move ahead with policy tightening to curb inflationary pressures, higher borrowing costs will exacerbate debt vulnerabilities,” the IIF said. “The impact could be more severe for those emerging market borrowers that have a less diversified investor base.”
Since the onset of the pandemic, global government debt has risen by 14 percentage points, or $17.4tn, to 103 percent of global GDP by the end of the first quarter of this year.
Faced with rising borrowing costs, sovereign balance sheets are under pressure. The financing needs of governments are still well above pre-pandemic levels, while higher and more volatile commodity prices could force some countries to increase public spending even further to ward off social unrest — especially if their economic growth remains lower than expected.
“Interest expense is becoming an increasingly heavy burden for sovereigns”, with sharp projected increases across mature markets, the IIF said. The higher interest rate situation is particularly difficult for emerging markets that have less fiscal headroom, it said.
While very large cash holdings of publicly listed companies provide a buffer against adverse shocks, rising debt levels have increased the sensitivity of corporate balance sheets to soaring interest rates.
Rising financing costs, coupled with heightened geopolitical risks, erased more than $16tn from global stock markets this year. “One-third of small-sized firms in mature markets are now facing difficulty covering interest expenses, making it particularly challenging for central banks to engineer a soft landing this time around,” the IIF said.
The sharp reversal in global risk appetite and economic uncertainty stemming from Russia’s military offensive in Ukraine has also forced a marked slowdown in debt for projects and deals adhering to environmental, social, and governance standards.
“However, the growing focus on energy independence should accelerate efforts to scale up climate finance, supporting the development of climate and, more broadly, ESG debt markets going forward,” the IIF said.