Global debt sees first annual drop in 8 years

Global economy’s debt has its first annual drop in dollar terms since 2015, in light of the post-pandemic recovery and inflation, according to a report published by the Institute of International Finance (IIF) on Wednesday.

The report has also estimated the nominal value of global debt decline to be $4 trillion, which is below the 2021 rate of $300 trillion.

The retrenchment was mainly by wealthier countries that witnessed a total debt decline by $200 trillion, while borrowing costs has risen for emerging markets, Reuters highlighted.

The amount of developing countries debt has reached its highest rate of $98 trillion, with Russia, Singapore, India, Mexico and Vietnam having the largest individual rises.

The global debt to GDP ratio saw a decline by 12 percentage to 338 percent of GDP, making it the second annual drop in a row.

The ratio is driven by developed markets, which saw a 20 percent to 390 percent fall, while emerging markets debt ratio inclined by 2 percent to 250 percent, largely represented by China and Singapore.

The IIF estimates that the emerging market’s debt to GDP ratio has reached 65 percent in 2022, previously reaching 64 percent.

The external debt of many developing countries showed a great decline as a result of sharp losses in local currencies in 2022 against the dollar.

The decline had pushed international investor demand for local currency emerging market debt to consecutive lows, with no sign of recovery, said the IIF.

Despite last year’s minimal fall in developed market debt, the rise since the global financial crash 15 years ago is great, said JPMorgan in an analysis published on Wednesday.

The developed market public sector debt had an incline of 122 percent from 73 percent before the crash, according to JPMorgan calculations. “The step-change in debt in just 15 years raises questions of sustainability,” said JPMorgan analysts.

Based on a debt sustainability framework, primary balance of developed markets would need to improve by 3.8 percent from its current level of 3.4 percent to prevent another incline in debt, JPMorgan analysts added.

Debt stability in the U.S. requires a 4.4 percent tightening in policy, while Japan, which is the highest major economy in debt rates, requires a nine percent tightening, according to Reuters.

The developed market would require a primary lending surplus of 4.3 percent for 10 years, a fiscal tightening rate of 7.7 percent maintained for a decade in order to reduce debt levels.