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Research - FEBRUARY 13, 2018

Record global debt gives rise to concern

by Jennifer Molloy

Global debt reached a record $233 trillion in third quarter 2017, increasing approximately $16.5 trillion for the year through September 2017, according to the Institute of International Finance’s Global Debt Monitor. Debt for all segments — Households, Non-financial corporate, Government, Financial sector —measured by the report increased for mature and emerging markets globally between fourth quarter 2016 and third quarter 2017.

Although certain factors have helped ease the global debt-to-GDP ratio to roughly 318 percent in third quarter 2017 from an all-time high of 321 percent in third quarter 2016 — including synchronized global growth, rising inflation (China, Turkey) and attempts to prevent a destabilizing debt buildup (China, Canada) — the report highlights hidden vulnerabilities:

  • High debt levels could constrain the pace and scale of monetary policy tightening as central banks continue to proceed with caution to help support growth.
  • There is potential for a drag on governmental debt servicing capacity for highly leveraged sovereign nations when global borrowing costs rise as major central banks look toward simultaneous monetary policy tightening for the first time in more than a decade. Higher borrowing rates are particularly concerning for countries that have experienced a sharp decline in their government debt/revenue dynamics, such as the United Kingdom, Japan, the United States and Brazil. “Should other countries attempt to compete with U.S. tax cuts (somewhat reminiscent of the 1980s and 1990s), this could add further pressure to debt and fiscal sustainability,” notes the report.
  • Overall, credit downgrades still outpace upgrades, with the rise in private-sector debt since 2015 most notable in Hong Kong, France, China, Switzerland, Turkey and Canada.
  • Private non-financial sector debt has reached record highs in Canada, France, Hong Kong, Korea, Switzerland and Turkey.
  • China’s total indebtedness rose modestly in 2017, to 294 percent of GDP, but the pace slowed significantly in 2017, to just 2 percentage points from an average 17 percentage points per year between 2012 and 2016.
  • At more than $14 trillion (72 percent of GDP), U.S. non-financial corporate debt is increasing, making smaller firms particularly vulnerable.
  • In a rising interest rate environment, stronger hard currencies would pose substantial risks for some emerging markets.
  • Heavy redemptions are expected with emerging market bonds and syndicated loads as more than $1.5 trillion of these mature through the end of 2018.

 

Since the global financial crisis, interest rates and borrowing costs remained low for years on the heels of unprecedented monetary-policy intervention by central banks around the world. Now, to keep pace with record-high property prices in major markets such as Sydney, high household debt has become “Australia’s Achilles’ heel,” states Shane Oliver, AMP Capital’s chief economist and head of investment strategy and economics, in the firm’s recent Market Watch: What high household debt means for investors.

According to Oliver, the bottom line is, “in the absence of much higher interest rates or much higher unemployment — both of which seem unlikely, it’s hard to see a crash in the Australian property market, but it’s certainly an issue worth keeping an eye on, given the high level of household debt.”
As central banks start to unwind their quantitative easing programs and raise interest rates globally, given encouraging global growth prospects, investors will need to keep an eye on pricing in residential markets, unemployment rates and household debt, to see if central banks are moving cautiously enough to help prevent new crashes in residential markets globally.

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