Canada is among developed-market debt leaders as last year’s slowdown in borrowing is reversed in the first quarter
With protracted trade wars and other geopolitical concerns threatening to hold back economic momentum around the world, central banks such as the U.S. Federal Reserve have become increasingly dovish in recent weeks. But that accommodation could be contributing to a grave problem.
According to a report from the Institute of International Finance (IIF), falling interest rates have propelled a fresh borrowing spree across the world, said Reuters. In the first quarter, global debt expanded by US$3 trillion, and emerging markets reached record highs in debt.
“The 2018 slowdown in debt accumulation is looking more blip than trend: helped by the substantial easing in financial conditions, borrowers took on debt in Q1 2019 at the fastest pace in over a year,” wrote IIF deputy director Emre Tiftik in a note.
The world’s debt reportedly jumped to US$246.5 trillion, or 320% of GDP, putting it at the threshold of the historically high water mark in debt set in the first quarter of last year. With a continuation of cheap borrowing costs in the cards amid broad-based central bank easing, Tiftik said there could be “more debt buildup across the board, undermining deleveraging efforts and reigniting concern about long-term head-winds to global growth.”
Accumulating government debt was the chief contributor to developed markets’ debt stock, adding US$1 trillion in the first quarter. Finland, Canada, and Japan were found to have the largest increase in debt-to-GDP ratios over the past year; several economies in the Eurozone, notably the Netherlands, Ireland, and Portugal, continued on their path of deleveraging.
The U.S., meanwhile, saw its total debt rise by US$2.9 trillion since Q1 2018, taking the country’s debt to an all-time high of more than US$69 trillion in the first quarter. That was primarily propelled by federal government debt, though amber signals are flashing for U.S. firms.
“With U.S. corporate debt growing above trend, an increase in bank lending has helped push the debt of non-financial corporate firms to a new high of near 75 per cent of GDP, adding to worries about vulnerabilities in the corporate sector,” Tiftik said.
The IIF also found that debt owed by governments, companies, financial institutions and households across developing economies surged from US$68.9 trillion a year earlier to US$69.1 trillion, which represented 216 per cent of GDP. Chile, Korea, Brazil, South Africa, Pakistan, and China reportedly experienced the most drastic increases in debt-to-GDP ratios over the past year.
“The persistent economy-wide increase in EM borrowing continues to feed into higher contingent liabilities for many sovereigns,” Tiftik said. “Growing reliance on short-term debt leaves many emerging markets exposed to sudden shifts in global risk appetite.”
He noted that US$3 trillion of emerging-market bonds and syndicated loans are coming due through the end of 2020, with a third represented by US-dollar denominated issues.
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