COVID-19 Response Drives $15 Trillion Surge In Global Debt, Set To Hit 365% of GDP By End Of 2020

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The global response to the COVID-19 has driven a $15 trillion surge in debt since 2019, hitting a new record of over $272 trillion in Q3 2020. As the fiscal response to the pandemic continues, we expect global debt to hit $277 trillion (365% of GDP) by end-2020.

Global debt on track to exceed $277 trillion in 2020:

Spurred by a sharp rise in government and corporate borrowing as the COVID-19 pandemic wears on, the global debt load increased by $15 trillion in the first three quarters of 2020 and now stands above $272 trillion. With little sign of a slowdown in debt issuance, we estimate that global debt will smash through records to hit $277 trillion by the end of the year (Chart 1).

Chart 1: Global debt topped $272 trillion in Q3 2020

COVID-19 Response Drives $15 Trillion Surge In Global Debt, Set To Hit 365% of GDP By End Of 2020
Source: IIF, BIS, IMF, National sources

Debt ratios should stabilize after a sharp surge in 2020:

Following a record surge in global debt-to-GDP (from 320% to around 362% in H1 2020), the rise in Q3 2020 was more modest, at less than 2 percentage points—helped by the strong global recovery. We expect that the global debt-to-GDP ratio will reach some 365% of GDP in 2020.

COVID-19 Response Drives $15 Trillion Surge In Global Debt, Set To Hit 365% of GDP By End Of 2020

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Debt in mature markets surpassed 432% of GDP in Q3 2020, up by over 50 percentage points from 2019. The U.S. accounted for nearly half of the rise, with total debt on track to hit $80 trillion in 2020—up from $71 trillion in 2019. Most of the rise was in the general government (up to $3.7tn) and non-financial corporate sectors (up to $1.7tn).

In the Euro Area, a $1.5 trillion rise in government debt pushed total debt over $53 trillion in Q3 2020 (though this is still below the all-time high of $55 trillion in Q2 2014). Debt in other mature markets rose by over $3.7 trillion to $65 trillion in the first three quarters of 2020.

Emerging market debt fast approaching 250% of GDP: EM debt rose from 222% of GDP in Q4 2019 to over 248% of GDP in Q3 2020. The dollar amount of EM debt now surpasses $76 trillion, with the rise, was driven by a surge in non-financial corporate debt in China. Excluding China, the USD value of EM debt declined from $31 trillion in Q4 2019 to $29.3 trillion in Q3 2020, largely reflecting losses in EM currencies against the USD.

Debt outside the financial sector hit $206 trillion in Q3 2020, up from $194 trillion in 2019. Governments ac- counted for 60% of the $12 trillion buildups in the world’s debt pile (ex-financials). Global non-financial corporate debt rose by over $4.3 trillion to a fresh high of near $80 trillion, while household debt rose by $500 billion, to near $50 trillion.

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Canada, Japan and the U.S. have seen the biggest increases in non-financial sector debt this year, with the rise in debt-to-GDP ratios varying from 45 percentage points in the U.S. to over 75 percentage points in Canada (Chart 2). Across mature markets, government debt has again been the main driver of the rise, increasing the most in Canada, Japan, the U.S., the UK and Spain. Of note, Ireland is the only country in our sample to see a decline in the total debt ratio, as de- clines in household and non-financial corporate debt offset the rise in government debt.

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Lebanon, China, Malaysia and Turkey have seen the biggest increases in non-financial sector debt ratios since 2019 among EMs (Chart 3). While sharp economic contractions drove surging debt ratios in many cases (notably in Lebanon), the USD value of debt also rose sharply in China, Egypt, Saudi Arabia, the Philippines, and Turkey over the first three quarters of 2020. The rise in non-financial corporate debt in China—from 150% of GDP in Q3 2019 to over 165% in Q3 2020–has been striking. We estimate that China’s total debt-to-GDP topped 335% of GDP—vs 200% of GDP in 2011 (Chart 4).

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Rising debt service burdens for emerging markets:

Largely reflecting the massive monetary policy response to the pandemic, corporate borrowers have been able to lock in lower funding costs at longer-than-average maturities. With short-term debt securities accounting for over 45% of total issuance in mature markets (Chart 5), lower policy rates have also slashed borrowing costs for governments—a big benefit given widespread COVID-related revenue losses.

In emerging markets, however, these revenue losses have made debt service burden much more onerous—despite the benefit from lower borrowing costs (Chart 6). We estimate that some $7 trillion of EM debt will come due through end-2021, with USD-denominated debt representing 15% of the total.

Beyond 2020:

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The pace of global debt accumulation has been unprecedented since 2016, increasing by over $52 trillion. While some $15 trillion of this surge has been recorded in 2020 amid the COVID-19 pandemic, the debt build-up over the past four years has far outstripped the $6 trillion rise over the previous four years and over an earlier comparable period (Chart 7).

As a result, there is significant uncertainty about how the global economy can deleverage in the future without significant adverse implications for economic activity. The next decade could bring a reflationary fiscal response, in sharp contrast to the austerity bias in the 2010s.

If the global debt pile continues to grow at the average pace of the last 15 years, our back-of-the-envelope estimates suggest that global debt could exceed $360 trillion by 2030-over $85 trillion higher than current levels (Chart 8).

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COVID-19 Response Drives $15 Trillion Surge In Global Debt, Set To Hit 365% of GDP By End Of 2020 - Brand SpurCOVID-19 Response Drives $15 Trillion Surge In Global Debt, Set To Hit 365% of GDP By End Of 2020 - Brand Spur

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COVID-19 Response Drives $15 Trillion Surge In Global Debt, Set To Hit 365% of GDP By End Of 2020 - Brand SpurCOVID-19 Response Drives $15 Trillion Surge In Global Debt, Set To Hit 365% of GDP By End Of 2020 - Brand Spur

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