Global debt increased by $3.3 trillion to a new record high of over $305 trillion in the first quarter (Q1) of 2022, according to the latest Global Debt Monitor from the Washington-based Institute of International Finance (IIF).
The IIF said the debt is around 348% of global GDP — 15 percentage points below its peak in Q1 2021.
“The surge was largely driven by China ($2.5tr) and the U.S. ($1.8tr),” said the report.
“In contrast, total debt in the Euro Area declined for the third consecutive quarter.
“The rise was mainly driven by corporate (ex-financials) and general government borrowing, with debt outside the financial sector now topping $236 trillion — up nearly $40 trillion since the onset of the pandemic.
“EM (emerging market) debt is now approaching a record $100 trillion.”
The IIF said debt interest expense is becoming an increasingly heavy burden for sovereign borrowers, with sharp projected rises expected across mature markets.
“As the ripple effects of the Russia/Ukraine war continue to disrupt global economic activity, growth is expected to slow significantly this year, with adverse implications for debt dynamics,” said the report.
“On the back of strict lockdowns in China and tighter global funding conditions, the anticipated slowdown will likely limit or even reverse the downward trend in debt ratios.
“However, the inflation outlook will also play a role: higher inflation will continue to help reduce debt ratios in general, while sovereign and corporate borrowers that have less FX and short-term debt may benefit most from rising inflation — at least in the near term.
“That said, as central banks move ahead with policy tightening to curb inflationary pressures, higher borrowing costs will exacerbate debt vulnerabilities.
“The impact could be more severe for those EM borrowers that have a less diversified investor base.”
The report said that since the onset of the pandemic, global government debt has risen by 14 percentage points ($17.4tr) to 103% of GDP in Q1 2022.
“With government financing needs still running well above the pre-pandemic levels, higher and more volatile commodity prices could force some countries to increase public spending even further to ward off social unrest — especially if economic growth is lower than expected,” said the report.
“This might be particularly difficult for emerging markets that have less fiscal space as interest expense rises.”
The IIF said non-financial firms have piled up more than $14 trillion of new debt since 2019, bringing total non-financial corporate debt to over $90 trillion in Q1 2022.
“While very large cash holdings of publicly listed firms provide a buffer against adverse shocks, rising debt levels have increased the sensitivity of corporate balance sheets to soaring interest rates,” said the report.
“Rising financing costs, coupled with heightened geopolitical risks, have erased more than $16 trillion from the value of global equities year-to-date.
“Despite some correction in recent months, equity valuations are still stretched in mature markets and corporate earnings estimates remain largely upbeat.
“However, around one-third of small-sized firms in mature markets are now facing difficulty covering interest expenses, making it particularly challenging for central banks to engineer a soft landing this time around.”