Invesco: Uncommon truths – Global debt review 2023

by | Jul 12, 2023

Global debt ratios declined again in 2022 on the back of the rebound in nominal GDP (a benefit of inflation) and declines in public sector debt. The effect of higher interest rates is yet to be fully seen in debt service ratios and we fear corporate debt could become a problem in some countries.

The man from Mars may question whether planet Earth has a debt problem (if so, to whom is it owed?). However, the global financial crisis (GFC) showed that, even if net debt is zero, it is difficult to unwind that debt when there are so many interlinkages. We therefore assume that more debt brings more risk. Hence, our annual review of global debt. Now that the Bank for International Settlements (BIS) has published its 2022 data, we are able to deliver the next instalment.

After a record jump in global debt to GDP ratios in 2020, further relief came in 2022. Nearly threequarters of the 2020 gain has now been reversed when PPP (purchasing power parity) exchange rates are used (nearly all has been reversed when using market exchange rates). The sharp jump in debt to GDP in 2020 was the result of a combination of rising debt (especially in the public sector) and falling GDP (both of which were due to the effects of the Covid pandemic). Though, the decline in the debt ratio in 2021 was entirely due to the jump in GDP, as debt continued to rise, that of 2022 was due to a mix of falling public sector debt and rising nominal GDP.

The global debt to GDP ratio fell to 236.4% in 2022 from 247.1% in 2021 (and 257.9% in 2020), based on the BIS “All-Country” non-financial sector debt to GDP ratio, using PPP exchange rates to convert to US dollars. That debt to GDP ratio was 228.4% in 2019.

We believe that using PPP exchange rates to calculate such aggregates avoids the volatility that comes with market exchange rates. For example, using market exchange rates, the BIS All-Country aggregate debt-toGDP ratio rose from 247.0% in 2019 to 291.0% in 2020 and has since fallen back to 247.9%.

The BIS All-Country aggregates only go back to 2002, so we have constructed our own aggregate across the world’s 25 largest economies (as of 2019, measured by GDP). They accounted for around 84% of World GDP in 2022, according to IMF data. Figure 1 shows the results and suggests that, after reaching a new high of 269.5% in 2020, the global debt to GDP ratio fell back to 254.7% in 2022 (it was 239.6% in 2019). Our measure is based upon actual exchange rates, so we use a smoothing process to dampen the effect of exchange rate swings (see the note to Figure 1).

On that basis, global debt to GDP declined in all three sectors (household, corporate and public), though debt increased in all categories (which is slightly different to the outcome for BIS all-reporting countries aggregate mentioned above, where public sector debt fell).

Figure 2 shows the detail of last year’s fall in debt by country and sector (in terms of changes to debt-toGDP ratios). The global debt ratio declined by around 10 percentage points, with the majority of the decline accounted for by public sector debt (as already mentioned). Total debt ratios declined in 22 of the 25 countries that we follow, with the biggest reductions in the UK, Spain and Belgium. Among those three, the public sector was the only one to see a decline in the local currency amount of debt, with rising GDP doing the rest of the work in bringing down the debt-to-GDP ratios.

At the other end of the spectrum, China, South Korea and Argentina were the only countries to see a rise in total debt ratios, with the local currency value of debt rising in all sectors in those three countries (though rising GDP enabled declines in some sector debt-GDP ratios). Looking to longer term trends, total debt ratios have risen substantially in the last 10 years. The global debt to GDP ratio increased by 20.0 percentage points in the 10 years to 2022 (using PPP exchange rates) or 29.1 percentage points (using market exchange rates), with most of that rise coming before 2019. The 10-year change is largely due to the rise in corporate and public sector debt.

Around one-third of the 25 countries experienced a decline in their total debt to GDP ratio over the last 10 years, the Netherlands being the most notable with a decline of 73.3 percentage points to 280.7%. The decline in the Dutch debt to GDP ratio was fairly evenly spread across the household, corporate and public sectors.

China is once again the country with the largest rise in the debt to GDP ratio over the last 10 years, with a 105-percentage point increase (from 191.1% to 297.2%), with big contributions from all three sectors but especially the public sector. Next in line are South Korea (+ 61.9 ppts over 10 years), Japan (+58.2 ppts) and Thailand (+53.5 ppts). The latter is the country with the largest three-year increase (+38.7 ppts), with the public sector accounting for half of that.

So where does this leave accumulated debt across countries? Figure 3 shows debt to GDP ratios for the 25 countries that we follow. As has been the case for some time, the countries with the biggest debt burdens are to be found in the developed world, with Japan once again leading the way, though its debt to GDP ratio edged down from 416.1% in 2021 to 414.1% in 2022, according to BIS data. The next two countries (France and Canada) are the same as last year. The first change in ranking occurs at #4, with Sweden moving up from #5 and replacing Belgium, which falls to #7.

At the other end of the spectrum, the two countries with the lowest debt ratios (Indonesia and Mexico) are unchanged from last year.

Other countries on the move in 2022 in Figure 3 include: Switzerland (from 6 th to 5 th), China (10th to 6 th), Netherlands (7 th to 8th), South Korea (13th to 9th), US (12th to 10th), Spain (9th to 11th), UK (8 th to 12th), Italy (11th to 13th), Thailand (15 th to 14 th), Australia (14th to 15th), Russia (21st to 19 th), Argentina (23 rd to 21st), Turkey (19th to 22 nd), Saudi Arabia (22 nd to 23 rd ).

So, after a sharp rise in debt ratios in 2020, there were declines in 2021 and 2022, due partly to rising GDP and partly to a decline in public sector debt. If economies continued to expand, we would normally expect a further decline in debt ratios as public sector expenditure declines and public and private revenues increase. However, many economies are slowing and we fear that recession is possible in some countries.

Of course, debt only becomes a problem when debt service ratios increase. The rise in debt to GDP ratios over the last 10 years was easily absorbed because bond yields fell to historical lows in the developed world. However, the sharp rise in bond yields during 2022 may change the picture. Governments have the luxury of being able to use the tax system to increase income if debt service ratios increase. The private sector has no such ability (raising prices may damage sales), so it is perhaps more important to focus on the affordability of private sector debt.

China is the ultimate example of how the effect of rising debt over the last 10 years didn’t turn into a financing problem. BIS private non-financial sector data shows that China’s debt service ratio (interest payments plus amortisations divided by income) increased by only 3.9 percentage points (from 16.7% at end-2012 to 19.6% at end-2022), despite a 62.1 percentage point increase in the private sector debt to GDP ratio (to 219.5%).

However, interest rates and bond yields rose sharply during 2022, which will have started to have an effect on debt service ratios. Of course, the rise in interest rates will take time to boost funding costs as some of the debt will be on a fixed-rate multi-year basis. Nevertheless, there were noticeable gains in private sector debt service ratios in Brazil (+5.4 percentage points to 26.3%), Australia (+2.6 to 20.1%) and South Korea (+2.3 to 23.1%). The rise in Australia’s debt service ratio came despite a substantial fall in the private sector debt to GDP ratio.

Among the 25 largest economies that we follow, the only one to enjoy a sizeable decline in the private sector debt service ratio was Turkey (-5.7 percentage points to 14.0%). This reflects a 23.4 percentage point decline in the private sector debt to GDP ratio to 66.2% but may also be due to a decline in government bond yields in the latter part of 2022, which may have reduced private sector funding costs (the decline in the service ratio occurred in 2022 Q4).

For the most part it is not the household sector that faces difficult debt service ratios (with perhaps the exceptions of Australia, Canada, South Korea and Sweden). More problematic is corporate debt and we suppose the biggest threat would be in countries where service ratios are the highest. As of end-2022 that list of countries would be France (non-financial corporations debt service ratio of 57.1%), Sweden (51.1%), Canada (50.4%), Netherlands (48.2%), Belgium (43.6%), South Korea (42.2%) and the US (40.4%). For the most part, those are the countries in which corporate sector debt is the most elevated (unfortunately, the BIS does not show the split between household and corporate sector debt service ratios in China, where corporate sector debt is high).

Unless stated otherwise, all data as of 07 July 2023.

By Paul Jackson, Global Head of Asset Allocation Research at Invesco.

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