Record global debt gives rise to concern
- June 1, 2018: Vol. 5, Number 6

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, nonfinancial 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 (Canada, China) — 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 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 Brazil, Japan, the United Kingdom and the United States.
  • Overall, credit downgrades still outpace upgrades, with the rise in private-sector debt since 2015 most notable in Canada, China, France, Hong Kong, Switzerland and Turkey.
  • Private nonfinancial sector debt has reached record highs in Canada, France, Hong Kong, South 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 only 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. nonfinancial 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 because more than $1.5 trillion of these mature through the end of 2018.

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 around the world.

Jennifer Molloy is senior editor of Institutional Real Estate Asia Pacific.

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