Global debt surges to record levels in first quarter due to Covid-19 fallout

Debt levels reached $258tn, a record high of 331 per cent of gross domestic product

A container is loaded on to a ship at Qingdao's port in China. The country's debt is on track to hit 335 per cent of GDP, according to a new report by the IIF AP

Global debt surged to record levels in the first quarter due to “widespread recessionary conditions” caused by the coronavirus pandemic, according to the Institute of International Finance.

Total debt stood at $258 trillion (Dh947.6tn), equal to 331 per cent of gross domestic product, after growing by 10 percentage points from the fourth quarter of 2019.

“While this marks the largest quarterly increase in global debt ratios on record, the actual rise in debt was only $1.2tn, well below the average quarterly rise of $2tn over 2015 to 2019. However, available data on issuance suggests that the pace of debt build-up has accelerated since March, largely reflecting the massive global fiscal and monetary response to the pandemic,” the report said.

The Covid-19 outbreak has tipped the world economy into a recession that is set to be the worst since the Great Depression, according to the International Monetary Fund.

The global economy is expected to contract by 4.9 per cent this year due to a more severe economic fallout from the pandemic.

Central banks and governments around the world have topped up their fiscal support to limit Covid-19's economic damage.

“With some $11tn in global fiscal stimulus approved and another $5tn in the pipeline, gross debt issuance hit an eye-popping record of $12.5tn in the second quarter, versus a quarterly average of $5.5tn in 2019,” the institute said.

The corporate sector accounted for more than 65 per cent of growth in the global debt-to-GDP ratio in the first quarter, the report said.

Total debt in the financial sector increased to $64tn during the first quarter, up from $8tn in 2016, while financial corporate debt grew by $12tn to reach $75.5tn, a record high at 95 per cent of GDP.

“Looking ahead, we expect the rise in corporate debt to continue at an accelerated pace. With abundant central bank liquidity, the decline in borrowing costs for corporates has already led to a substantial surge in corporate bond and loan issuance since March, amounting to [about] $4.6tn in the second quarter versus a quarterly average of $2.8tn in 2019,” IIF said.

Debt in mature markets hit 392 per cent of GDP, with Canada, France, the US and Norway recording the largest increases, the report said.

At $185tn in the first quarter of this year, total debt in mature markets is $22tn more than it was in 2016, with the US accounting for half of it.

The total debt in emerging markets also surged to more than 230 per cent of GDP in the first quarter of 2020, compared to 220 per cent in the fourth quarter of 2019, largely driven by non-financial companies in China.

However, the economies recorded a slight drop in debt levels to $72.5tn on the back of currency depreciations against the dollar.

China’s debt is on track to hit 335 per cent of GDP in the second quarter. Total debt across all sectors including household, government, financial and non-financial companies increased from 302 per cent to about 318 per cent of GDP in the first quarter.

Corporate defaults are also on the rise as companies suffer due to the measures taken to contain the coronavirus, the report said.

“With corporate earnings plunging and credit downgrades on the rise, the face value of defaulted non-financial corporate bonds jumped to a record $94bn in the second quarter of 2020.

"The US accounted for [about] 75 per cent of this, followed by the euro area [14 per cent] and China [3 per cent].”

Earlier this month, the IMF urged governments to be cautious as they borrow more money to offset the impact of the pandemic.

The fund also made $100bn in emergency financing available for low-income and emerging market countries.

“While rising debt levels will raise concerns about debt dynamics and creditworthiness, [more than] 92 per cent of government debt is still investment grade,” the IIF report said.