Since COVID-19, the global economy has been put to the test with supply chain disruptions, price volatility for commodities, challenges in the job market, and declining income from tourism. The World Bank has estimated that almost 97 million people have been pushed into extreme poverty as a result of the pandemic.
Globally governments have had to increase their expenditures to deal with higher healthcare costs, unemployment, food insecurity, and to help businesses to survive. Countries have taken on new debt to provide financial support for these measures, which has resulted in the highest global debt levels in half a century.
The debt-to-GDP ratio is a simple metric that compares a country’s public debt to its economic output. By comparing how much a country owes and how much it produces in a year, economists can measure a country’s theoretical ability to pay off its debt.
The top 10 countries in terms of debt-to-GDP:
Japan, Sudan, and Greece top the list with debt-to-GDP ratios well above 200%, followed by Eritrea (175%), Cape Verde (160%), and Italy (154%).
In 2010, Japan became the first country to reach a debt-to-GDP ratio 200%, and it now sits at 257%. In order to finance new debt, the Japanese government issues bonds which get bought up primarily by the Bank of Japan. By the end of 2020, the Bank of Japan owned 45% of government debt outstanding.
A rapid increase in government debt could be a major cause for concern. Generally, the higher a country’s debt-to-GDP ratio is, the higher chance that country could default on its debt, therefore creating a financial panic in the markets. This is assuming its borrowings are in USD or a foreign currency.
The World Bank showed that countries that maintained a debt-to-GDP ratio of over 77% for prolonged periods of time experienced economic slowdowns. Again, the work of Reinhart and Rogoff suggest a ratio of above 90% will result in growth declining drastically.
COVID-19 has worsened a debt crisis that has been brewing since the 2008 global recession. The International Monetary Fund (IMF) shows that at least 100 countries will have to reduce expenditures on health, education, and social protection. Also, 30 countries in the developing world have high levels of debt distress, meaning they’re experiencing great difficulties in servicing their debt.
This crisis is hitting poor and middle-income countries harder than rich countries. Wealthier countries are borrowing to launch fiscal stimulus packages while low and middle income countries cannot afford such measures, potentially resulting in wider global inequality.
Global debt reached $303 trillion by the end of 2021.
Global government debt is set climb to $71.6 trillion in 2022 or 94% of world’s GDP. For the U.S. the ratio is estimated at 125.6% in 2022 and 127% in 2027. Debt is projected to continue to rise in emerging markets, driven mainly by China, reaching 72.1 percent of GDP by 2024. China's government debt-to-GDP ratio is expected to be 77.8 percent in 2022 and continue to rise to 95.4 percent in 2027.
Over the medium term, global public debt is likely to stabilize at about 95 percent of GDP, 11 points higher than before the pandemic, according to the IMF.
Malaysia’ Federal Government debt was RM958.4 billion or 63.3% of GDP in 2021. The good point is over RM925 billion or 96% is in RM, which means exchange rate exposure is manageable. That’s the key – USD or RM? If USD then we are beholden to the U.S. Otherwise less so, but requires more prudence going forward. Why? Future generations have to bear the cost of today’s indulgence!
References:
Visualing the state global debt, by country, Raul Amoros, Visual Capitalist
Global public debt to fall to 94% of GDP in 2022: IMF, Kyodo News, 20 Apr 2022
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