Rising debt casts shadow over global economy
Debt risk remains the sword of Damocles hanging over the sustainable growth of the world economy. In 2017, global debt continued to rise amid an intensifying imbalance of debt risk distribution, which exacerbated the possibility of global systemic risk and brought new uncertainties to global financial stability, hampering long- term economic growth.
All across the world, debt risk is on the rise. According to the Institute of International Finance ( IIF), global debt surged to a record $ 217 trillion as of the end of the first quarter this year, up $ 500 billion year- on- year and up $ 50 trillion from a decade earlier – or equivalent to 327 percent of global GDP. While the US, Japan and five European countries long ago saw their public- sector debt break through the warning line in terms of debt- to- GDP ratio, emerging economies are facing higher debt risk and pressure from the repayment of short- term debt.
IIF data showed that emerging economies had increased borrowing by $ 3 trillion year- on- year to $ 56 trillion as of the first quarter of 2017, equivalent to 218 percent of their combined GDP, up 5 percentage points compared with the first quarter of 2016.
Unlike developed countries that have carried out deleveraging since the global financial crisis, there has been an obvious increase in leverage in emerging economies. Since 2008, weak global demand has significantly reduced the need for imports from developing countries, which in turn has led to a sharp fall in external surpluses among the export- oriented emerging economies. This indicates a tightening of liquidity obtained by the emerging economies from abroad. Against this backdrop, emerging economies had to compensate either by absorbing foreign financing or through domestic financing, and that led to an overall rise in leverage in these economies in terms of both their balance of payments and domestic finances. In particular, overseas bond issues by non- financial companies based in emerging markets have soared rapidly.
As the US dollar will likely appreciate amid the US’ rising interest rate cycle, emerging economies are expected to face increased risk from high levels of US dollar- denominated foreign debt, which may push up global debt and financing costs accordingly.
Statistics from the IIF showed that emerging market countries may have more than $ 1.9 trillion of bonds and loans falling due by the end of this year, with about 20 percent of the total denominated in the US dollar.
While there are cyclical and structural reasons behind the rapid expansion of global debt, monetary and fiscal stimulus policies have contributed to it. Since the 2008 global financial crisis, various countries have eased their monetary policies by maintaining low or even negative interest rates. That stance has, however, failed to produce substantial economic growth, which depressed the potential growth rate of the world economy and drove up debt levels. Heavy debt burdens have suppressed investment, further weakening growth in labor productivity. In turn, relatively low growth in labor productivity has made the debt burden unsustainable, creating a “vicious cycle.”
Although the global economy currently shows signs of steady recovery with monetary easing coming to an end, the volume of negative- yielding debt has risen. In July, the amount of negative- yielding bonds jumped by 25 percent to $ 8.68 trillion, the highest level since October 2016, according to data from financial website Zerohedge. As to fiscal stimulus policies, developed countries’ pace of fiscal expansion has generally slowed over the past two years. However, the Trump administration’s proposed massive tax cuts and $ 1 trillion infrastructure plan have exacerbated the risk of surging US federal debt and fiscal deficits.
According to US think tank Committee for a Responsible Federal Budget, President Donald Trump’s tax plan could cost $ 5.5 trillion in lost revenue during the first decade. If a new tax plan takes effect, it could push US federal debt from the current 77 percent of GDP to 111 percent, the highest level in history. It is estimated that by 2035, US federal debt will amount to 180 percent of GDP, putting the entire financial system at risk.
Both developed and emerging markets are still facing tough challenges from the absolute level of debt, the growth of debt and the repayment of short- term debt. With the US dollar expected to begin a new round of appreciation, the supply of US dollar- denominated assets will contract, the global investment and savings structures will have to adjust, and the current accounts of surplus countries and deficit countries will be rebalanced.
In this context, global real interest rates and bond yields will start to rebound from record lows, leading to a rise in borrowing costs and triggering defaults.
Here lies the challenge for policymakers in various countries, who should reduce the use of the unconventional monetary policy tools that have been used to stimulate their economies, promote structural reform and financial reform, and accelerate the adjustment of government, corporate and bank balance sheets.
It is essential to lower debt levels by improving productivity and capital return ratios. Doing so will lay the foundation for continued growth in the global economy.
It is essential to lower debt levels by improving productivity and capital return ratios.