The world’s two largest economies were the heaviest borrowers in the first three months of this year as global debt climbed to above $305 trillion, the Institute of International Finance (IIF) reported on Wednesday.
Its data showed that China’s debt increased by $2.5 trillion over the first quarter and the United States added $1.5 trillion. The total debt in the Eurozone declined for a third consecutive quarter, the IIF said.
According to the analysis, many countries, both emerging and developed, are entering a monetary tightening cycle with high levels of dollar-denominated debt.
“As central banks move ahead with policy tightening to curb inflationary pressures, higher borrowing costs will exacerbate debt vulnerabilities,” the IIF report said. “The impact could be more severe for those emerging market borrowers that have a less diversified investor base,” it added.
Corporate debt outside of banks and government borrowing were the largest sources of the increase in borrowing. Debt excluding the financial sector surged above $236 trillion, some $40 trillion higher than two years ago when the pandemic hit. Government debt has risen more slowly in the same period.
“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,” said the report, noting that “this might be particularly difficult for emerging markets that have less fiscal space.”
The IIF also said that growth is expected to slow significantly this year, which would have adverse implications for debt dynamics. “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,” it explained.
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