Global debt reached a new record high at the end of 2023, hitting $313 trillion, according to the latest report from the Institute of International Finance (IIF). This figure represents a staggering increase of more than $15 trillion in a single year, reflecting the continued rapid pace of borrowing that began at the height of the COVID-19 pandemic and raising serious questions about the sustainability of the global financial system and the ability of countries to meet future economic challenges.
Historical context: How did we get here?
This surge didn't happen in a vacuum; it's the cumulative result of several crises and economic policies over the past two decades. It began with the 2008 global financial crisis, which prompted governments and central banks to inject massive liquidity and slash interest rates to near zero to stimulate the economy, making borrowing cheap and attractive. Then came the COVID-19 pandemic in 2020, which necessitated huge financial support packages from governments to protect households and businesses from the fallout of economic lockdowns, leading to an unprecedented jump in government debt.
Who are the main drivers of this rise?
A report by the Institute of International Finance indicated that governments in advanced economies were the primary drivers of this debt growth. The United States, China, and the Eurozone accounted for the largest share of this increase, with their combined debt representing more than 75% of all new debt. This is attributed to persistent budget deficits and increased public spending to address the economic slowdown and geopolitical challenges.
Across sectors, the impact wasn't limited to governments; it also included non-financial corporations and households that increased their borrowing in the previously low-interest-rate environment. However, the monetary tightening cycle initiated by global central banks to curb inflation has altered the landscape, making the cost of servicing this debt an ever-increasing burden.
Expected impact: Varying challenges across economies
The data reveals a clear disparity in debt-to-GDP ratios between countries. In advanced economies, the ratio has declined slightly to around 330%, driven by relatively stronger economic growth. However, the picture is much bleaker in emerging markets, where the debt ratio has continued to rise, reaching a new record high of over 255%.
This surge in emerging markets poses a significant risk, as these countries face multiple challenges, including weak currencies against the dollar and high debt refinancing costs. The Institute of International Finance estimates that emerging markets are facing a so-called “refinancing wall,” meaning they must repay or roll over billions of dollars in debt in the coming years in a high-interest-rate environment, placing immense pressure on their budgets and potentially pushing some toward default.
Looking ahead: Between cautious growth and debt risks
The International Monetary Fund projects cautious global growth of 3.1% in 2024 and 3.2% in 2025. However, the enormous mountain of debt could undermine this growth, as governments are forced to allocate a larger share of their revenues to debt servicing rather than investing in infrastructure, education, and healthcare. Managing this unprecedented level of debt will be the biggest challenge facing policymakers, both domestically and internationally, this decade.
