Global debt declined by $1.7 trillion to some $289 trillion in Q1 2021—the first decline in 10 quarters. The drop was entirely driven by mature market economies, where total debt dropped from $2.3 trillion to below $203 trillion.
However, debt in emerging markets rose slightly in Q1 (+$0.6 trillion) to a fresh record high of over $86 trillion (though this was a significantly slower pace than that of the previous three quarters). And despite the Q1 dip, total global debt is still up $30 trillion (12%) since the end of 2019, now standing at over $288 trillion. Mature markets accounted for nearly two-thirds of the rise.
…but global debt-to-GDP still hovering near all-time highs:
Despite the slight drop in total debt, debt ratios continued to increase in Q1 as economic activity remained below pre-pandemic levels in many countries. However, the pace has slowed dramatically: after a jump of over 36 percentage points in 2020, global debt/GDP rose only one percentage point in Q1 2021, to just over 360% of GDP.
New borrowing has slowed: with global bond issuance now back below pre- COVID levels, debt ratios should dip slightly this year given the projected recovery in global economic activity.
Still rising—mature market government debt, EM private-sector debt:
In mature markets, the financial sector accounted for nearly half of the decline in debt levels in Q1 2021, with household and non-financial corporate debt also declining slightly. In contrast, mature market government debt continued to increase, but at its slowest pace since Q4 2018.
Across emerging markets, the increase in debt was driven by the private sector. With EM government debt broadly stable, the non-financial corporate and financial sectors have been the main drivers of the debt buildup.
Greece, Singapore, and Spain have seen the sharpest increases in debt-to-GDP ratios (ex-financial sector) since the onset of the pandemic, though the pace slowed in Q1 2021. Denmark, Slovenia, Estonia, Finland, Lithuania, and the U.S. were the only mature market economies recording a decline in debt ratios (ex-financials) in Q1.
Government spending was the main driver of the overall rise in mature market debt ratios in Q1, increasing the most in Slovakia, Greece, Cyprus, Italy, and Spain.
Tentative signs of stabilization in global debt?
Eyes on EM government debt:
While relatively stable in Q1 2021, the EM government debt-to-GDP ratio has surged from 52% in Q4 2019 to near 60%. Certainly, the increase in government debt ratios has been sharper in mature markets, up from 110% of GDP to near 135% of GDP over the same period.
The slower rise in EM government debt is largely a reflection of fiscal constraints—emerging markets simply have relatively less fiscal capacity. However, many EM sovereigns have stepped up borrowing significantly, with the median EM government debt level now around 15% higher than in 2019. While less than the 22% median increase in mature market government debt, this is still a big jump.
In our sample of EM countries, Brazil, and Argentina have been the only countries recording a decline in the USD value of government debt. Since the onset of the pandemic, the share of FX-denominated debt in total EM government debt (ex-China) has remained broadly stable at around 15%, though the reliance on FX has increased in Turkey and Chile.
Government revenues still under pressure in many emerging markets:
While near-term sovereign debt vulnerabilities in major EM economies have eased back to pre-pandemic levels, government revenues remain under pressure due to continued lockdowns.
With vaccination still relatively slow in many emerging markets, sovereigns with high borrowing need risk having persistently high interest expenses relative to revenues and GDP.
While global financing conditions remain strongly supportive, pandemic-related spending increases and revenue losses have made debt service a greater burden for many EMs including the Philippines, South Africa, India, Indonesia, and Turkey.
For many EMs, much-needed improvements in domestic tax regimes could help boost revenue capacity. However, heightened political and social tensions as the pandemic wear on could limit governments’ willingness to deliver structural tax reforms, leaving many sovereigns more reliant on domestic and international debt markets.
Planning for the future:
With climate change on top of the global policy agenda and the race to net-zero emissions accelerating—notably for international investors—emerging markets are under increasing pressure to accelerate the transition to a low-carbon economy. Failure to reduce reliance on carbon-intensive activities could add to upward pressure on EM government borrowing costs by reducing investor appetite for EM assets.
For example, a 10 per cent increase in climate vulnerability is estimated to increase EM sovereign spreads by 100 basis point on average. On the flip side, improvements in climate change resilience should help EM sovereigns to tap international debt markets at more favourable rates.
Indeed, some estimates suggest that fiscal spending on ESG priorities could boost economic activity by 3 to 11 times more than conventional government spending.
Higher growth and revenues would in turn help offset rising debt ratios while supporting the development of ESG bond markets to mobilize domestic and international resources towards green and sustainable investment projects in emerging markets—see our new Sustainable Debt Monitor.