The ominous shadow of global debt

The clouds of a potential debt crisis are threatening to cast an ominous shadow over the global economic landscape.

The International Monetary Fund's (IMF) latest Fiscal Monitor (April 2024) has flagged grave concerns. Even four years past the Covid-19 outbreak, fiscal deficits and debts remain elevated worldwide compared to pre-pandemic projections.

The IMF's latest Global Debt Monitor, which tracked data until December 2022, reported total global debt (private plus public) to have risen to $235 trillion, equivalent to 238 per cent of the global gross domestic product (GDP) — a good 9 percentage point above its pre-Covid level, driven primarily by the mounting debts of economic powerhouses China and the US. Remarkably enough, China's debt explosion, outpacing the rest of the emerging world, accounted for over half of the increase in global debt ratios since 2008 sobering statistic that underscores the gravity of the situation.

The April Fiscal Monitor further highlights that fiscal prudence may take a back seat in 2024, the "Great Election Year," when 88 economies, representing more than half of the world's population, are scheduled to hold elections. Electoral compulsions leading to populist measures and profligate spending (to woo voters) could exacerbate deficits and debts globally, compounding the looming debt crisis and jeopardising long-term economic stability.

With the global economy settling into a new normal of lower potential growth and tighter monetary policy, the debt runup seems poised to regain fresh momentum. The ramifications of excessive debt are going to be far-reaching and potentially catastrophic.

First, as interest rates remain elevated to combat lingering inflation, with the US federal funds rate now between 5.25 per cent and 5.5 per cent, its highest since 2007, the debt servicing cost will continue to spiral. Over the last decade, US interest payments have more than doubled, crossing $1 trillion in 2023, driven by a record $34 trillion debt on its account.