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A recent report by CareEdge Ratings examines the potential implications of the surge in global debt following COVID-19, revealing how it has reached concerning levels of USD 92 trillion, accounting for about 92% of global GDP in 2022. Nearly USD 19 trillion, or about 20% of this global public debt, has been accumulated since the onset of 2020. According to data from the International Monetary Fund, this Global Public Debt is expected to surge to USD 132 trillion by the year 2028.

The escalation of global debt has emerged as a major concern in the aftermath of the COVID-19 pandemic, reveals a report by CareEdge Ratings. Analyzing various debt cycles post-2008 Global Financial Crisis, the report reveals that the rapid rise in debt levels post COVID has caused the quantum of debt distress to rise steadily, increasing default risk in low-income countries.

Mehul Pandya, Managing Director and CEO, CareEdge Group said, “There has been a sharp rise in debt levels across Advanced and EMDEs post the pandemic. Many of the advanced economies, even with high debt levels, enjoyed low debt servicing cost due to low interest rates in the past. But now, with interest rates expected to remain higher for a longer period, they will feel the pain of rising debt servicing cost.”

Speaking on the report, Rajani Sinha, Chief Economist, CareEdge Ratings said, “The recent surge in global debt has been remarkable both in its rapid ascent and sheer volume. With the sharp rise in debt levels, the quantum of debt distress has also been rising steadily.  Since 2020, about 19 economies have either defaulted on their debt obligations or restructured debt with 7 in 2022 alone. These numbers seem very high when compared to 11 sovereign defaults or debt restructuring events across countries between 2008-19. Increased Chinese loans have also heightened the debt vulnerabilities of the recipient countries as these loans come at relatively higher interest rates and there is lack of transparency in terms and conditions of these loans.”

Higher for longer interest rates puts a dent in government balances

The report reveals that higher for Longer interest rates have put a dent in the government finances especially for the highly indebted advanced economies like UK, USA, Italy, France, Spain. These economies had been enjoying very low interest rates post 2008 Global Financial Crisis. Post-Covid, supply chain disruptions and the Russia-Ukraine conflict triggered inflationary pressures, prompting central banks to increase interest rates. Since 2021, policymakers have raised rates by an average of 400 basis points in advanced economies and approximately 650 basis points in EMDEs.

EMDEs inherently face higher interest burdens and borrowing costs due to increased credit risks. The coupon rate on new debt issuances for most EMDEs rose from 3-5% in 2021 to 5-8% in 2022.

Rise in quantum of debt distress

The “higher for longer" interest rates has led to increased borrowing costs for government debt, subsequently elevating debt service costs. These increased rates have posed significant challenges for governments in both advanced economies and EMDEs. The default risk in low-income countries is now very worrying. Low-income EMDEs like Ghana, Zambia, Pakistan, and Sri Lanka have significant public debt and are vulnerable to the rising burden of interest rates.  The rising global interest rates make it further difficult for EMDEs to pay off their debt.

Since 2020, about 19 economies have either defaulted on their debt obligations or restructured debt with 7 in 2022 alone. These numbers seem very high when compared to 11 sovereign defaults or debt restructuring events across countries between 2008-19. According to the Bank of Canada-Bank of England database on sovereign defaults, the total sovereign debt in default amounted to USD 554 billion in 2022, about a 34% jump as compared to 2021.

Loan from China have heightened the debt vulnerabilities of recipient countries

CareEdge Rating in the report says that while Chinese loans have often been mutually beneficial for both the creditor and the debtor, it also heightened the debt vulnerabilities of recipient countries due to the size of loans, relatively higher interest rates and lack of transparency in terms and conditions of the loans.

The data from the World Bank indicates that loans from China escalated from USD 333 billion in 2012 to USD 952 billion in 2022, marking a CAGR of 11%.

CareEdge in the report believes that addressing a debt crisis typically involves a heterodox mix of policies, including fiscal prudence, productivity enhancement, and policy reforms. However, given the current fragile state of economic recovery, the process of debt deleveraging could be protracted and more challenging than anticipated.