IIF warns of global debt explosion

Global debt soared to a new high of US$217 trillion in early 2017 - equal to 327 per cent of GDP - although borrowing in mature economies has slowed.

The fresh record was driven by the rapid growth of issuance in emerging markets where debt rose to an eyewatering US$56 trillion for the 2017 first quarter, an Institute of International Finance (IIF) report released on Wednesday revealed. This figure - which is up by US$3 trillion or 5 percentage points year-on-year - is equal to 218 per cent of their GDP.

"Behind the headlines; the debt burden is not distributed evenly," said Hung Tran, the Washington think tank's executive managing director.

"Some countries/sectors have seen deleveraging while others have built up very high debt levels. For the latter, rising debt may create headwinds for long-term growth and eventually pose risks for financial stability. 

"While levels of debt and debt tolerance differ significantly across countries and sectors, the persistent rise in economywide debt - along with declining credit quality for the non-financial corporate sector - continues to feed into higher contingent liabilities for sovereigns in many jurisdictions. And in some cases, this sharp debt build-up has already started to become a drag on sovereign credit profiles, including in countries such as China and Canada."

The IIF - which represents the world's top banks - said the rise in the total debt has been sharpest in China where issuance climbed by some US$2 trillion to over US$32.7 trillion.

Still, there was little sign of slowdown in emerging markets, even taking China out of the picture. Total debt issuance still increased by some US$0.9 trillion to over US$23.6 trillion in the first quarter, driven mainly by Brazil and India.

Bond issuance

Importantly, the IIF highlighted a wave of maturing debt this year that presented a "a high rollover risk".

It has estimated that more than US$1.9 trillion of emerging market bonds and syndicated loans will mature this year, with dollar-denominated debt accounting for some 15 per cent of the total. Upcoming heavy redemptions are estimated to be the largest in China, Russia, Korea and Turkey.

The report further revealed that emerging market FX-denominated bond issuance is running at its fastest pace since 2014 - over 70 per cent in US dollars.

A strong recovery in US dollar-denominated bond issuance has been the main driver of the rise, with gross bond issuance amounting to some US$300 billion over the past year. The rise in FX debt has been most striking in Turkey, Saudi Arabia, Malaysia and Israel.

Elsewhere, the report flagged some deleveraging in the US, notably by the financial sector. Though total US debt has risen by US$2 trillion to over US$63 trillion in the last year, the debt-to-GDP ratio has dropped by 2.5 percentage points, as nominal GDP growth has outpaced debt growth.

The report also recorded a drop in mature market debt stock - outside the US - from US$103.4 trillion to US$97.7 trillion in the last twelve months. This was driven by a steady fall in Eurozone private sector debt, although broad weakness in mature market currencies against the US dollar in recent years contributed. 

Nonetheless, weak nominal GDP growth has meant that private sector debt-to-GDP ratios have risen, the IIF report found.

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