The Covid-19 pandemic and its aftermath has pushed the global debt
higher by $32 trillion in 2020 to $290.6 trillion led by government and non-financial corporate debt, and will continue to rise in 2021, said a latest release by Moody's Investor Service (Moody's). Persistent decline in productivity growth, it believes, poses medium-term challenges to debt sustainability with Africa and the Caribbean being the two most vulnerable regions in the emerging markets (EMs).
“Despite an uptick in defaults, policy support prevented a debt crisis in emerging markets, but the pandemic and its aftermath will challenge their debt-servicing capacity. Advanced economies have more fiscal space but will face productivity and demographic challenges,” Moody's said.
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That said, the recovery in global economy
from the Covid pandemic’s aftermath will be staggered with the US leading the recovery, while services-dependent Southern European economies will lag. Despite the rise in non-performing loans, banking systems entered the pandemic with stronger capitalisation ratios and will remain resilient, the rating agency said.
Government debt, according to Moody's surged to 105 per cent of global gross domestic product (GDP) in the fourth quarter of 2020 (Q4-2020) from 88 per cent before the pandemic, its highest level since the aftermath of World War II.
“The pandemic will push government debt to record highs, but levels have already increased dramatically over the past decade. The pandemic will set back progress on social goals and add to existing challenges in many countries, such as slow growth, low investment, dependence on volatile commodity prices and vulnerability to climate shocks,” Moody's said.
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Household debt, on the other hand, rose to 66 per cent of GDP from 61 per cent at the end of 2019, partly reflecting loan moratoriums and the resilience of residential real estate markets through the pandemic, the rating agency said.
“Non-financial corporate debt experienced the second-largest increase, rising to 102 per cent of GDP from 93 per cent at the end of 2019. EM’s ratio of corporate debt-to-GDP is higher than that of advanced economies. Financial corporate debt grew to 86 per cent of GDP from 80 per cent at the end of 2019,” Moody's said.
Emerging versus developed markets
EMs, Moody's believes, are facing rising debt-servicing costs and deteriorating external vulnerability. An added risk are the tightening financial conditions. In this backdrop, Central and Eastern Europe is better positioned than Latin America or Asia, while Africa and the Caribbean are most vulnerable, the rating agency said.
Developed markets have their own set of challenges to tackle. Though low interest rates will support debt affordability and have more fiscal space in the short term, Moody's believes they will face medium-term debt sustainability challenges arising from low productivity growth and unfavorable demographic trends.
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Corporate debt rose by 27 percentage points (pp) of GDP between 2010 and 2020 in EMs (16 pp in advanced economies during this period), while government debt rose by 22 pp (36 pp in advanced economies).
"Advanced economies contributed 65 per cent of the build-up in government debt between 2010 and 2020. Greece, Spain, Slovakia, Cyprus, the UK, Portugal and Italy saw the sharpest increases. EM contributed 64 per cent of the rise in corporate debt following the global financial crisis, particularly China, Russia, Turkey and Chile, among others," Moody's said.
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