In the year since the COVID-19 pandemic threw the global economy into a tailspin, the level of global debt — money owed by governments, businesses and households — has jumped by 12% to $289 trillion. And while some countries appear to have begun the task of reducing overall indebtedness, many governments in countries transitioning to full market economies are finding it difficult to do so.
According to data collected by the Institute of International Finance, the largest share of the $30 trillion in borrowing that has occurred since the end of 2019 has been done by sovereign governments, which took on $13.4 trillion in additional debt over that period.
While many advanced economies are finding their footing again, with vaccination rates rising and infection rates falling, the progress against the pandemic in countries not yet fully integrated into the global economy — known as “emerging markets” — is highly variable. This means that in some countries that borrowed heavily during the past year, interest payments on debt have increased, even as tax revenue and other income have been slashed by lower economic output.
Across the 31 emerging market countries tracked by the IIF data, government debt increased by 15% between the end of 2019 and the end of the first quarter of this year. Outliers included the Czech Republic and Ghana, which saw their sovereign debt grow by more than 35% during that period, as well as the Philippines, China, Indonesia and Israel, all of which saw an increase of more than 25%.
Debt payments growing
This leaves experts worried not just about how countries will pay their newly accumulated debts, but whether they will have the financial capacity to respond to new economic shocks in the future.
The more debt a country accumulates, the less confident lenders become in its ability to successfully take on additional loans — resulting in higher interest rates and eventually, an inability to access cash from global capital markets. This can handcuff a government trying to respond to an emergency, be it a pandemic, natural disaster or armed conflict.
According to Emre Tiftik, director of sustainability research at the IFF, the spike in indebtedness among emerging market economies came at the end of more than a decade in which their borrowing was already on the rise.
Winners and losers
Increased borrowing “can be good or bad,” Tiftik said. “If the proceeds are used wisely in a productive way, that can help to boost the economic activity and boost potential growth, most importantly, and will create new jobs. But unfortunately, when we look across the spectrum, there are some winners and there are some losers. Many of them have been using this rapid pace of debt accumulation for short-term gains, to boost economic activity in the short term at the cost of delaying [addressing] problems to another time.”
Then came the pandemic. Tiftik said with debt levels already very high, some emerging market countries were unable to borrow on good terms and either took on more onerous debt or were forced to scale back efforts to protect their citizens from the worst of the pandemic’s impact.
Tiftik said his major concern is that many of these countries have already stretched their borrowing capacity greatly and are far from seeing the end of the pandemic, meaning their economic output will recover more slowly than can be expected in mature markets.
“Now, they are much more vulnerable to unexpected shocks,” he said.
Mature markets borrowed more
The governments in mature markets such as the United States, the United Kingdom, France and Germany borrowed even more than those in emerging markets during the pandemic, and in general, they carry a higher debt-to-gross domestic product ratio. But they also enjoy much larger capacity to service debt, and in the case of nations like the U.S., are borrowing in a currency that they themselves control.
Some countries in the category of mature markets increased their debt levels dramatically during the pandemic. Estonia, for example, increased its debt by 92% during the pandemic, but from a very low baseline of just $3 billion. Other countries with particularly large increases included New Zealand at 81%, Slovakia at 59%, and Australia at 56%.
Countries in the euro area increased their sovereign debt by an average of 20%, though with widely differing margins. Denmark, for example, increased its obligations by just 12%, while Luxembourg’s debt increased by 41%.
US still borrowing
While the majority of the 28 mature market economies followed by the IIF began taking steps to reduce debt levels in the first quarter of 2021, the U.S. was not among them, adding an additional $372 billion in borrowing to a national debt that stands at more than $27 trillion.
For fiscal hawks, who understood the necessity of additional borrowing in response to the pandemic, the continued increase in the national debt — even as the country appears to be recovering well — is a real concern.
“I'm not aware of any other country that's done the kind of borrowing we have in 2021,” said Marc Goldwein, senior vice president and senior policy director for the Committee for a Responsible Federal Budget.
It was one thing, he said, when the U.S. was part of a concerted global effort to avoid an economic catastrophe by issuing new sovereign debt. But now that many advanced economies are paring back their debt rather than issuing more, the dynamics have changed.
“We're going to leave this crisis with a lot of global debt, and also a lot of global savings. But it seems that in the United States, our new debt is going to ultimately exceed our new savings, because we're rowing in a different direction from the rest of the world.”