- Everyone will pay - rich and poor alike
- Debt is increasingly expensive to maintain
- Dangerous consequences of rising debt
Everyone will pay - rich and poor alike
The International Monetary Fund (IMF) forecasts that global public debt will exceed $100 trillion in 2024, approaching 100% of GDP by 2030 and, in a worst-case scenario, far outstripping the size of the world economy by 2026.
As the IMF points out in its Fiscal Monitor report, debt growth is forecast for Brazil, France, Italy, South Africa, the United Kingdom and the United States[1].
"Fiscal adjustments are likely to be much more significant than currently planned to stabilize or reduce debt. Now is the time to rebuild fiscal buffers, as postponement will be costly," the organization said.
Debt burdens are traditionally particularly high in developed countries. This is confirmed by data from the Institute of International Finance (IIF). According to them, the debt-to-GDP ratio in developed markets was 376.8% of GDP (308.7% last year). Developing countries such as China, India and Mexico are the biggest contributors to the increase in global debt. The ratio of emerging market debt to GDP has reached a record 245%, 25 percentage points higher than before the pandemic (240.8% last year).
The main reason is high government spending. Debt growth accelerated sharply during the pandemic when many countries had to increase spending to support households and businesses significantly.
There are other reasons for the rapid growth of global public debt. Many countries are continuing to increase borrowing to finance a wide range of programmes and projects, especially in the areas of climate change and energy transition.
Debt is increasingly expensive to maintain
As experts point out, the main problem is not so much the debt itself as its becoming increasingly difficult to service.
"This increase in debt burdens in many countries means an increase in financial risks linked to rising inflation and volatility in stock markets. High debt payments limit countries' ability to invest in infrastructure and social programs, slowing economic growth in countries with high debt burdens," says Nikolay Pereslavsky, Head of Economic Research at CM Service.
However, it is clear that developed countries, because of the size of their economies and their budgetary capacity, find it easier to manage their debts than poorer countries.
"For example, the US has a national debt of 123% and Sri Lanka's is 114%. Despite this, the United States is still managing its debt burden well, while Sri Lanka has already been unable to redeem its sovereign bonds. Therefore, countries with small GDPs (over USD 1 trillion) and debt burdens above 100% are at risk," says Pavel Paevski, Head of Credit Analysis and Macroeconomics at RSHB Asset Management.
The debt amount itself is not critical as long as the sovereign can repay the debt. This allows the United States to maintain a very high level of public debt as confidence in the economy and the dollar remains stable globally. However, the situation in Venezuela shows that, even with a relatively low level of debt as a percentage of GDP, the country can regularly face deflation due to defaults[2].
Nevertheless, the US's huge financial liabilities, which have exceeded USD 35 trillion, are raising more questions. The Fed has said that it is no longer possible to raise the debt ceiling and allow further increases in borrowing. US creditors rightly question whether America will be able to pay the interest on its massive debt in the future. The US economy, as the largest in the world, and the US dollar, as the main reserve currency, are going through difficult times today.
Dangerous consequences of rising debt
Analysts believe the growing debt burden is not good for the global economy.
"In the long term, it could lead to a decline in productivity and a slowdown in economic growth. The rise in public debt over the past two decades has coincided with a slowdown in productivity growth and potential GDP growth in major economies. This suggests that over-reliance on government spending can lead to inefficient allocation of resources and a reduction in overall economic efficiency," explains Vladislav Antonov, Financial Analyst at BitRiver.
Moreover, given the rising cost of debt servicing, an increasing share of fiscal spending will be spent on debt interest payments rather than on more productive purposes such as education or social protection. The analyst adds that this situation could lead to a reduction in investment in human capital and infrastructure, which will ultimately harm economic growth and the well-being of the population. Finally, high maintenance costs severely limit the ability of governments to respond to future shocks or crises[3].
