China and the United States have led the increase of global debt that could hit a record US$255 trillion at the end of 2019, imposing potential risks on countries with slowing growth, according to the Washington-based Institute of International Finance.
The world’s largest two economies contributed over 60 per cent of the US$7.5 trillion increase in global debt over the first half of 2019, according to the Institute of International Finance. The overall debt load – including both financial and non-financial sectors – stood at over US$250 trillion at the end of June, equivalent to 320 per cent of global gross domestic product (GDP).
The debt-fuelled growth has added more pressure on economies around the world, many of which have experienced slowing growth this year, and can expect further slowing next year, due in large part to the impact of the US-China trade war on the global economy.
With over 60 per cent of the world’s countries expected to see below-potential growth in 2020, accommodative central bank policy allows both corporates and sovereigns to borrow and refinance at low rates,
Institute of International Finance
“With over 60 per cent of the world’s countries expected to see below-potential growth in 2020, accommodative central bank policy allows both corporates and sovereigns to borrow and refinance at low rates,” said Institute of International Finance analysts led by Emre Tiftik.
The International Monetary Fund estimated last month that US growth would slow to 2.1 per cent next year, down from this year’s estimate of 2.4 per cent. In the third quarter of 2019, the US economy grew 1.9 per cent, leading the US Federal Reserve to cut the benchmark interest rate for the third time this year to a range of between 1.5 per cent to 1.75 per cent.
Chinese economic growth slowed to 6.0 per cent in the third quarter, and many economists expect it to fall below 6 per cent next year.
The People’s Bank of China has refrained from following the US Federal Reserve in making large cuts in borrowing costs, limited in part by its desire not to create a sharp rise in debt as well as not contribute to price pressures given the sharp rise in the consumer price index in recent months due to soaring costs for pork and other meat products. It cut the interest rate on its medium-term lending facility by only 5 basis points last week, the first cut in that rate since early 2016.
According to the Institute of International Finance, over the past decade, global debt has ballooned by more than US$70 trillion, most of which has been driven by governments and corporations.
For developed countries, the rise of overall debt has been driven by higher government borrowing. The US government’s debt-to-GDP ratio rose to 100.5 per cent in the second quarter of 2019, which put it on a par with the level in the Eurozone. Japan had the highest government debt-to-GDP ratio of nearly 280 per cent.
Debt from emerging markets topped US$71.4 trillion in the first half of the year, reaching a record high of 220 per cent of GDP. Debt from Chile, South Korea and Argentina rose the fastest among all emerging economies, while corporate debt was the biggest driver of the debt load for emerging economies, with around half coming from state-owned enterprises.
This trend also highlights the challenges many [emerging market] governments are likely to face in managing contingent liabilities related to [state-owned enterprise] borrowing
Institute of International Finance
“This trend also highlights the challenges many [emerging market] governments are likely to face in managing contingent liabilities related to [state-owned enterprise] borrowing,” the Institute of International Finance said.
China’s debt to GDP ratio in the non-financial sector, covering consumers, companies and the government, rose to 251 per cent of GDP at the end of September, the National Institution for Finance and Development, a Beijing-based think tank affiliated with the Chinese Academy of Social Sciences, reported on Wednesday.
The growth of China’s debt has been slower than previously as Beijing has tried to contain financial risks and stabilise growth.