Global debt soared to a record $281 trillion in 2020, and is expected to rise further this year as countries grappling with widening fiscal deficits and the impact of Covid-19 on their economies continue to borrow amid low interest rates.
The overall rise in global debt levels in 2021, however, will be "modest" as some economies bounce back, and borrowing trajectories of governments will likely vary significantly, the Institute of International Finance said in its latest Global Debt Monitor.
While some pandemic-related fiscal measures will expire in 2021, budget deficits are set to remain well above pre-pandemic levels, and global government debt is expected to rise by another $10tn this year, surpassing $92tn by the end of 2021.
"The pace of vaccination differs considerably across countries, and difficulty in vaccine rollout could delay recovery, prompting further debt accumulation," the IIF said, echoing a similar view held by the International Monetary Fund.
"For highly indebted countries facing ongoing fiscal constraints, difficulty in accessing and distributing vaccines could thus contribute to further debt strains, particularly in low-income countries."
The ratio of global debt-to-gross domestic product surged 35 percentage points to over 355 per cent in 2020. That exceeds the rise seen during the global financial crisis, when the increase in 2008 and 2009 was limited to 10 and 15 percentage points, respectively.
Government debt in 2020 topped 105 per cent of GDP, up from 88 per cent in 2019. It accounted for more than half of the overall rise last year, increasing by more than $12tn, compared with a $4.3tn jump in 2019.
Mature markets saw the biggest increase in government debt – more than $10.7tn – as the fiscal response to the pandemic was constrained in most emerging markets.
"Although sizeable budget deficits have been essential to tackle the crisis, finding the right exit strategy could be even more challenging than after the 2008-09 financial crisis," the IIF said. "Political and social pressure could limit governments’ efforts to reduce deficits and debt, jeopardising their ability to cope with future crises."
Governments and central banks globally have provided more than $12tn in monetary and fiscal support since the outbreak of the pandemic. Interest rates have been cut and liquidity injections and asset purchases by central banks have helped prevent a financial meltdown. However, governments are still looking at widening fiscal deficits amid an uneven global economic recovery.
Second and third waves of the pandemic have triggered additional lockdowns across much of Europe, Asia and North America. However, the IMF expects the world economy to grow 5.5 per cent this year after contracting 3.5 per cent in 2020.
The IIF said a sharp pandemic-driven decline in government and corporate revenues have pushed total private and public debt of 61 countries in its sample, higher by $24tn last year. It made up for more than a quarter of the $88tn rise over the past decade.
Debt outside the financial sector hit $214tn, up from $194tn in 2019. Household and corporate sector borrowings surged 165 per cent of GDP in 2020, from 124 per cent in 2019.
"Supportive government measures such as debt moratoria and loan guarantee programmes – while much needed – pushed non-financial corporate debt some 8 percentage points higher, to 100 per cent of GDP," the IIF said.
"Many large firms, particularly in the US and Japan, have used this additional borrowing to build up their cash holdings, though small firms have had more difficulty building these buffers.”
Household debt increased 4 percentage points to 65 per cent of GDP last year. However, financial corporates saw the biggest annual jump in debt ratios in over a decade, rising by more 5 percentage points to 86 per cent of GDP in 2020.
Outside the financial sector, mature markets saw the biggest increases in debt ratios last year.
"The upswing was particularly sharp in Europe, with non-financial sector debt-to-GDP ratios in France, Spain, and Greece increasing some 50 percentage points," the IIF said. "Balance sheet vulnerabilities in the non-financial corporate sector have also increased significantly across many countries, particularly in France."
In emerging markets, China saw the biggest rise, followed by Turkey and South Korea. South Africa and India recorded the largest increases in government debt ratios, while the run-up in corporate debt was the largest in Peru and Russia.