Ageing populations to increase finance requirements of advanced economies

Fiscal positions likely to deteriorate in the absence of measures to boost productivity, Moody’s report says

A pedestrian wearing a protective face masks walks past the Colosseum in Rome, Italy, on Tuesday, Feb. 25, 2020. Italy appears never far from a recession, and the spread of the coronavirus may just tip it back into the danger zone. Photographer: Alessia Pierdomenico/Bloomberg

Ageing populations in many advanced economies are likely to raise their debt and financing requirements in the coming decades, according to a new report from Moody’s Investors Service.

At the same time, shrinking labour forces and lower household savings are expected to constrain funding available to  governments.

"New or wider financing gaps for governments due to ageing, absent measures to offset these trends, would have knock-on effects on their borrowing costs and debt affordability," said Christian Fang, assistant vice-president and analyst at Moody’s.

"While central banks may step in to keep a lid on interest rates, this could present challenges related to monetary policy design and effectiveness," he added.

The report highlighted that the challenges were starkest in Greece and Italy, where financing gaps of around 15 per cent of gross domestic product could open by 2040. Financing gaps in Japan and Portugal would also be sizeable, exceeding 5 per cent of GDP by 2040, and more modest financing gaps would open in Austria and Spain.

"[In the] 12 fastest-ageing countries in the Organisation for Economic Co-operation and Development (OECD), fiscal positions will deteriorate in the absence of measures to raise productivity growth or government revenue, or to lower non-ageing related expenditure significantly," the report said.

“The other six advanced economy sovereigns will continue to have sufficient net private savings to fund government deficits even in 2040 [but] the financing surplus for these governments would shrink substantially,” it added.

While in the near to medium term, household saving rates may rise in anticipation of longer time in retirement, over the longer term, population ageing is likely to lower saving rates as the proportion of retirees to the working age population increases.

Rising competition for a shrinking pool of savings in turn has the potential to raise borrowing costs, especially for governments whose capacity to attract stable external financing is untested, it said.

“Should financing costs rise over a sustained period, debt affordability will weaken while liquidity risk will rise from currently very low levels,” it said.