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Global government debt accumulation has doubled to $66 trillion

Publication Date: 24 Jan 2019 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav Sharma (Associate Editor ReachX)
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Events Macro Multi Asset Global

Global government debt reached $66trn, converted at market exchange rates, at end-2018, nearly double its 2007 level and equivalent to 80% of global GDP, according to fresh research. 

The figure has been published in a recent client report by Fitch Ratings, in which the agency raises concerns over rising  government debt levels opining that many countries are "poorly positioned for financial tightening" as interest rates begin to rise. 

Developed market (DM) government debt has been fairly stable in US dollar terms, at close to $50trn since 2012, the rating agency observed. In contrast, Emerging market (EM) debt has jumped to $15trn from $10 trn over the same period, with the biggest increases in percentage terms being in the Middle East and North Africa (104%) and Sub-Saharan Africa (75%), though these regions still have comparatively low debt stocks, at less than $1trn each."

"Government debt levels are high, leaving many countries poorly positioned for financial tightening as global interest rates begin to move higher," said James McCormack, Global Head of Sovereign Ratings at Fitch.

While there are only 11 sovereigns rated 'AAA' by Fitch and they account for about 40% of global government debt. However, the level is virtually unchanged over the last two decades. The US (AAA/Stable) is by far the world's most indebted government in dollar terms, with consolidated general government obligations close to $21trn.

"US debt is going up by about $1trn per year. To put that into perspective, the total debt stocks of France (AA/Stable), Germany (AAA/Stable), Italy (BBB'/Negative) and the UK (AA/Negative) were all in the range of $2.4 trn to $2.7 trn at end-2018," McCormack added

Consistent with the dominance of 'AAA' sovereigns, 93% of global government debt carries an investment grade (BBB- or higher) rating. The 'A' category is the second-largest, as Japan (A) and China (A+) are the second- and third-largest government debt markets, with outstanding stocks of $12trn and $6trn, respectively. 

The number of sovereigns rated in the 'B' category (or lower) has increased sharply in recent years, as several 'BB' commodity exporters were downgraded as they struggled with the correction in commodity prices, and the exceptionally low interest rate environment attracted new, less creditworthy, sovereigns to capital markets for the first time. Even so, sovereigns in the 'B' category (or lower) account for 28% of the rated portfolio but only 3% of global government debt. 

There has been a steady deterioration in the credit quality of government debt in recent years, Fitch said. In DMs, the average rating (weighted by the sovereigns' debt stocks in dollar terms) of outstanding government debt was just under 'AA' at end-2018, losing one notch since 2011. In EMs (excluding China), the average rating at end-2018 was slightly below 'BB+', its lowest since 2005. 

Estimated effective interest rates faced by governments (calculated as interest payments divided by the debt stock) have drifted lower since 2000 in all regions and rating categories. The lowest effective rates by rating are found in the 'A' category, largely reflecting conditions in Japan, and the highest effective rates by region are in Latin America, as has been the case since 2010. 

"In 2018 there were more upgrades than downgrades but, based on where we have negative rating outlooks, we believe 2019 looks less favourable, especially for the Latin America and Middle East and Africa regions," added McCormack

"Common themes that have driven sovereign ratings in the last few years will dominate again in 2019, including tightening sovereign financing conditions, commodity price fluctuations and political and geopolitical developments. Slowing economic growth in some countries may bring fiscal concerns back to the fore, particularly given the high starting positions with respect to government debt." 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma (Associate Editor ReachX)

 

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