Global debt climbs to record $303tn in 2021 amid pandemic-driven uncertainties

Overall rise of $10tn in debt in 2021 significantly lower when compared to 2020, Institute of International Finance says

Beijing skyline. More than 80 per cent of debt rise in 2021 came from emerging markets, which was driven by borrowings in China. AP

Global debt soared to a record $303 trillion in 2021 as governments and non-financial corporations continued to borrow amid low interest rates and persistent pandemic-related uncertainties fuelled by the emergence of new Covid-19 variants.

The overall rise of $10tn in debt last year, however, was significantly lower than the $33tn recorded in 2020 when governments borrowed extensively to fight the pandemic and minimise its impact on their economies, the Institute of International Finance said in its latest “Global Debt Monitor” report.

Governments and non-financial corporations recorded the largest increases in their borrowing last year. Debt outside of the financial sector climbed 4 per cent annually to $233tn.

However, economic recovery and higher inflation helped the global debt-to-gross domestic product ratio decline to 351 per cent last year from a high of more than 360 per cent in 2020. This is still 28 percentage points above pre-pandemic levels, the IIF said.

“The biggest declines were seen in the mature market corporate sector, both non-financial corporates and financial institutions,” the Washington-based institute said. It added that “75 per cent of the countries in our sample saw a decline in debt ratios last year”.

More than 80 per cent of the overall debt increase came from emerging markets, where total borrowings are fast approaching the $100tn mark. Total debt in emerging markets surged by $8.5tn to more than $95tn in 2021 — 248 per cent of their aggregate GDP, which is 20 percentage points higher than pre-pandemic levels.

“China saw the sharpest increases in the US dollar value of outstanding debt, which rose by $7tn to $60tn in 2021,” the IIF said.

The jump in China debt is about $2tn higher than the $5.3tn rise recorded in the US during that period.

“Still, at 330 per cent of GDP, total debt in China is around 6 percentage points lower than in 2020,” the IIF said.

Emerging markets are entering the 2022 US Federal Reserve rate cycle with record high refinancing needs — about $7tn of EM bonds and loans come due through the end of 2022, up from $5.5tn in 2021. Foreign exchange redemptions are seen at about $1tn, with relatively high US dollar refinancing needs for China, Saudi Arabia and Turkey.

“Gross external financing needs are back to pre-pandemic levels, but high reliance on short-term funding and FX borrowing leaves some emerging markets more exposed to changes in market sentiment and rising short-term US dollar borrowing costs,” it said.

Governments and central banks around the globe have poured an estimated $25tn in fiscal and monetary support to stabilise financial markets and minimise the impact of the pandemic on their economies. They borrowed extensively during the past two years to shore up finances and bridge fiscal gaps amid historically low interest rates.

However, the Fed is raising interest rates to combat rising inflation this year and next. The move will increase the cost of borrowing for government, corporate and institutional borrowers, particularly in emerging markets.

Robust growth in sustainable debt was also reported in the past year, with environment, social and government (ESG)-labelled issuances surpassing a record more than $1.4tn — almost double the pace of 2020.

At about $3.4tn, ESG debt markets make up only 1 per cent of the global debt universe including bonds and loans. However, their share in global long-term debt issuance is increasing at a rapid pace to more than 6.5 per cent last year, from 3 per cent in 2020.

“Our baseline scenario sees total global ESG debt issuance reaching $1.8tn in 2022 and near $3.8tn in 2025,” the IIF said.

“Under favourable market conditions, issuance could reach an annual pace of $7.2tn by 2025.”