Global debt set to hit record $255tn by end of year

Debt surged by $7.5tn in the first half of 2019, led by US and China, according to the Institute of International Finance

Jerome Powell, chairman of the US Federal Reserve, speaks during a House Budget Committee hearing in Washington, US on November 14. The IIF said global government debt is expected to top $70tn by the Show more

Global debt now hovers near a record of over $250 trillion (Dh918tn) and is set to exceed $255tn by the end of this year, the Institute of International Finance said in a new report.

“Spurred by looser financial conditions, the ballooning global debt load increased by $7.5tn” in the first half of 2019, the Washington-based organisation said.

“With few signs of a slowdown in the pace of debt accumulation”, the IIF expects the trend to continue, largely driven by the US and China, which accounted for over 60 per cent of the increase.

The world’s debt pile is now more than three times' (320 per cent) global gross domestic product. Emerging markets debt also hit a record of $71.4tn.

Non-financial sector debt — borrowing by governments, households and other businesses — accounts for $190tn, or 75 per cent, of total debt and is growing faster than the global economy.

Within the non-financial sector, government debt increased by 1.5 per cent in the first half. It is expected to top $70tn by the end of this year, an increase of around 6 per cent from 2018 “driven mainly by the surge in US federal debt”, the IIF said.

Borrowing from non-financial companies increased by 1 per cent in the first half and is also expected to increase by 6 per cent from last year to over $75tn, due to growth in “net borrowing by the Chinese corporate sector”.

Over the past decade, global debt has increased by over $70tn. In mature markets, the rise has been driven mainly by governments. For emerging markets, the bulk has been in non-financial corporate debt, but data shows that half of that borrowing is by state-owned enterprises.

“Sovereign-related borrowing has been the single most important driver of global debt over the past decade,” the report said.

Global bond markets have increased to over $115tn, from $87tn 10 years ago. Government bonds now make up 47 per cent of the market, compared with 40 per cent in 2009. In contrast, bank bonds have dropped to below 40 per cent from over 50 per cent in 2009.

Central banks have been lowering rates in an attempt to spur borrowing, as 60 per cent of the world’s countries are expected to see below-potential growth next year, the report said.

However, countries with high levels of government debt, such as Lebanon, may find it harder to turn to fiscal stimulus. Moreover, emerging market economies that have increasingly relied on foreign-currency borrowing, including Saudi Arabia and Turkey, may be exposed to risks if growth slows further.

High debt burdens could also curb efforts to tackle climate risk. Global climate finance flows amount to slightly over $1tn, far short of the average $3.5tn that the Intergovernmental Panel on Climate Change (IPCC) estimates is needed annually.

In separate research published earlier in the week, Bank of America Merrill Lynch said “yield curve inversion, global manufacturing recession, trade wars and rising debt defaults have raised the spectre of an imminent global economic recession”. It said the biggest vulnerability for markets in the coming decade “comes from today’s bond market bubble", adding that responses to the next slowdown will be inflationary.

Last month, the International Monetary Fund revised its global economy growth estimate for 2019 down to 3 per cent, its slowest expansion since the 2008 global financial crisis.