Global debt has surged to a record high of $312 trillion by the end of the second quarter of 2024, according to data from the Institute of International Finance (IIF). The financial services trade group cited significant borrowing from both the United States and China as the primary drivers of this increase, while emerging markets have seen a rise in their debt ratios. The challenge of financing climate change mitigation efforts is compounding the already complex issue of debt sustainability.

In its latest Global Debt Monitor report, the IIF warned that if current trends continue, global debt will continue to soar, with dangerous consequences for both advanced and developing economies. “With the Fed’s new easing cycle expected to accelerate the pace of global debt buildup, a significant concern is the apparent lack of political will to address rising sovereign debt levels in both mature and emerging market economies,” the IIF noted in its report.

Key Drivers of the Debt Increase

The $2.1 trillion rise in global debt during the first half of 2024 marks a slower rate of increase than in previous years, such as the $8.4 trillion jump in the first half of 2023. However, the new figure brings global debt to unprecedented levels, raising concerns about long-term sustainability. The United States and China were the primary contributors to this rise, but other countries such as India, Russia, and Sweden also added significantly to their debt burden.

The increase in borrowing comes against the backdrop of a global economy grappling with high inflation, energy transition demands, and the ongoing recovery from the COVID-19 pandemic. Countries have increasingly turned to debt markets to finance spending on infrastructure, social programs, and climate change initiatives.

A Closer Look at the Debt-to-GDP Ratio

A key metric for assessing a country’s debt sustainability is the debt-to-GDP ratio, which measures the size of a country’s debt relative to its economic output. The global debt-to-GDP ratio has stabilized at around 327%-328% in 2024. While this ratio has improved slightly due to inflation-driven increases in GDP, it remains alarmingly high, especially in emerging markets where it has reached record levels of over 245% of output.

Emerging markets have been particularly hard hit, with their debt levels more than 25 percentage points higher than they were before the COVID-19 pandemic. This increase in debt is concerning, as many developing countries are already grappling with weak economic growth and rising inflation, making it harder to service their debt.

In developed markets, the debt-to-GDP ratio has fallen to its lowest level since 2018, driven by declines in household and non-financial corporate sector borrowing. However, this improvement in developed markets does not alleviate the broader concerns about global debt levels, especially as inflation remains a major challenge in several economies.

The Role of Climate Finance in Global Debt Buildup

One of the most striking findings in the IIF report is the significant role that climate finance is playing in driving global debt levels. The energy transition, particularly the shift towards renewable energy and the efforts to mitigate the impact of climate change, is expected to account for over a third of the projected rise in global debt by 2050. Governments around the world are under increasing pressure to invest in clean energy infrastructure, reduce carbon emissions, and meet international climate targets.

However, these investments come with a hefty price tag. “This poses significant challenges, as many governments are already allocating a growing share of their revenue to interest expenses,” the IIF report stated. For many countries, the need to finance climate-related projects is stretching already tight budgets, forcing them to borrow even more to meet their obligations.

The IIF projects that global government borrowing will rise from its current level of $92 trillion to $145 trillion by 2030, and could exceed $440 trillion by 2050 if current trends continue. This massive increase in borrowing raises concerns about the ability of governments to manage their debt levels while simultaneously addressing the urgent need for climate finance.

Emerging Markets: A Growing Debt Challenge

Emerging markets are facing a particularly acute debt challenge. Many developing countries have limited access to financing options, and the global rise in interest rates has made borrowing more expensive. With inflation and currency depreciation adding to their woes, these countries are being forced to take on more debt to finance their budgets.

In countries like India, Russia, and Brazil, debt levels have soared in recent years as governments have increased spending on infrastructure and social programs. For many of these countries, the debt burden is becoming unsustainable, with debt service costs eating into their budgets and limiting their ability to invest in economic growth.

The IIF’s report highlights that many emerging markets are increasingly turning to international financial institutions like the International Monetary Fund (IMF) for help. The IMF has provided billions of dollars in emergency loans to countries struggling with high debt levels, but these loans come with strict conditions that often include austerity measures and structural reforms.

The debt-to-GDP ratio in emerging markets reached an all-time high of over 245% in 2024, raising concerns about the ability of these countries to repay their debts. This is especially worrying given that many of these countries are also dealing with high inflation, low growth, and a lack of political will to implement necessary reforms.

The United States and China: Leaders in Global Borrowing

The United States and China remain the largest contributors to global debt. In the U.S., the national debt has ballooned to over $33 trillion, driven by large budget deficits and high levels of government spending. The U.S. government’s borrowing has been fueled by a combination of tax cuts, military spending, and the need to finance large social programs such as Social Security and Medicare.

China, on the other hand, has seen its debt levels rise sharply as it continues to invest heavily in infrastructure and economic development. The Chinese government has also provided significant financial support to its state-owned enterprises, many of which are heavily indebted. While China has managed to keep its debt levels under control for now, there are growing concerns about the long-term sustainability of its borrowing.

The IIF’s report points out that both the U.S. and China are facing mounting fiscal challenges. In the U.S., rising interest rates are increasing the cost of servicing the national debt, while in China, the economic slowdown and the ongoing trade tensions with the U.S. are putting pressure on the government to take on more debt to support its economy.

Conclusion: The Global Debt Crisis and the Path Forward

The global debt crisis is a growing concern for policymakers around the world. With debt levels reaching record highs and the need for climate finance only adding to the problem, there is an urgent need for governments to address the issue of debt sustainability.

The IIF’s report highlights the importance of political will in tackling the debt crisis. Governments must take steps to reduce their borrowing, implement fiscal reforms, and invest in long-term economic growth. At the same time, there is a need for greater international cooperation to address the challenges of climate finance and ensure that countries have access to the resources they need to transition to a low-carbon economy.

As the world grapples with rising debt levels, the path forward will require bold action and innovative solutions. Policymakers must strike a delicate balance between managing their debt burdens and investing in the future, all while navigating the complex challenges of a rapidly changing global economy.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

26th September, 2024