Many countries entered the pandemic with elevated debt levels. Our new update of the IMF’s Global Debt Database shows that global debt—public plus private—reached $197 trillion in 2019, up by $9 trillion from the previous year. This substantial debt created challenges for countries that faced a debt surge in 2020, as economic activity collapsed and governments acted swiftly to provide support during the pandemic.
Higher debt can potentially reduce the ability of governments to react to the COVID-19 crisis.
Our data show that the global average debt-to-GDP ratio (weighted by each country’s GDP in US dollars) rose to 226 percent in 2019, 1.5 percentage points higher than in 2018. Most of the increase came from higher public debt in emerging market economies and advanced economies outside of Europe. In low-income countries, total debt rose by 1.3 percentage points of GDP in 2019—mostly driven, in contrast, by higher private debt.
As shown in our chart of the week, a dive into the numbers reveals that the 2019 global public debt surpassed its 2007 level by 23 percentage points of GDP. This is primarily driven by the higher levels among advanced economies, where public debt rose from 72 to 105 percent of GDP, and to a lesser degree by emerging market economies (from 35 to 54 percent of GDP) and low-income countries (an increase of 14 percentage points to 44 percent of GDP). Higher debt can potentially reduce the ability of governments to react to the COVID-19 crisis as forcefully as they were able to respond to the global financial crisis (see the January 2021 Global Financial Stability Update). However, many countries benefited from much lower borrowing costs in recent months, partially because very low inflation rates have allowed central banks to keep interest rates at record low levels. Compared to 2007, the average interest bill as a share of revenues was 0.3 percentage points lower in 2019.
Indeed, the high public debt did not immediately restrict the ability of many countries—especially the advanced economies—to borrow to address the crisis. But some highly indebted emerging market and developing economies are starting to find it more difficult to borrow to support the response to the pandemic.
High and rising private debt may also be cause for concern as countries try to transition to a solid recovery.
In the leadup to some past financial crises, we have seen private debt accumulate at a rate far exceeding GDP growth, so this phenomenon can be a warning sign of rising vulnerability. Past experience shows that following credit booms, economic activity tends to suffer. If private debt of households, firms, or both proves unsustainable, it can result in large-scale bankruptcies, which might require government intervention in the form of bailouts of critical sectors or government guarantees on private loans. Private sector debt can therefore pose an additional risk to governments that are already highly indebted. Moreover, as public finances are further stretched during the pandemic, elevated private debt levels before the pandemic can leave governments with less room to maneuver in promoting a healthy and robust recovery.
Global uncertainty reached unprecedented levels at the beginning of the COVID-19 outbreak and remains elevated. The World Uncertainty Index—a quarterly measure of global economic and policy uncertainty covering 143 countries—shows that although uncertainty has come down by about 60 percent from the peak observed at the onset of the COVID-19 pandemic in the first quarter of 2020, it remains about 50 percent above its historical average during the 1996–2010 period.
Uncertainty in systemic economies matters for uncertainty around the world.
What drives global uncertainty?
Economic growth in key systemic economies, like those of the United States and European Union, is a key driver of economic activity in the rest of the world. Is this also true when it comes to global uncertainty? For example, given the higher interconnectedness across countries, should we expect that uncertainty from the U.S. election, Brexit, or China-U.S. trade tensions spill over and affect uncertainty in other countries?
To answer this question, we construct an index that measures the extent of “uncertainty spillovers” from key systemic economies—the Group of 7 (G7) countries plus China—to the rest of the world. In particular, we identify uncertainty spillovers from systemic economies by text mining the Economist Intelligence Unit country reports, covering 143 countries from the first quarter of 1996 to the fourth quarter of 2020.
Uncertainty spillovers from each of the systemic economies are measured by the frequency that the word “uncertainty” is mentioned in the reports in proximity to a word related to the respective systemic-economy country. Specifically, for each country and quarter, we search the country reports for the words “uncertain,” “uncertainty,” and “uncertainties” appearing near words related to each country. The country-specific words include country’s name, name of presidents, name of the central bank, name of central bank governors, and selected country’s major events (such as Brexit).
To make the measure comparable across countries, we scale the raw counts by the total number of words in each report. An increase in the index indicates that uncertainty is rising, and vice versa.
Our results reveal two key facts:
First: Yes, uncertainty in systemic economies matters for uncertainty around the world.
Second: Only the United States and the United Kingdom have significant uncertainty spillover effects, while the other systemic economies play a little role, on average.
Starting with the United States, the chart below displays the global (excluding the United States) average of the ratio of uncertainty related to the United States to overall uncertainty. It shows that uncertainty related to the United States has been a key source of uncertainty around the world since the past few decades
For instance, during the 2001–2003 period, U.S.-related uncertainty contributed to about 8 percent of the uncertainty in other countries—about 23 percent of the increase in global uncertainty from the historical mean. n the last 4 years, U.S.-related uncertainty has contributed to about 13 percent of uncertainty in other countries—with peaks of about 30 percent—and approximately 20 percent of the increase in global uncertainty from historical mean.
Uncertainty related to the U.K.-EU Brexit negotiations has also had significant global spillovers in the last 4 years, with a peak of more than 30 percent and contributing to about 11 percent in the rise in global uncertainty during this period.
Finally, the ratio of uncertainty related to the other systemic countries to overall uncertainty shows Canada, China, France, Germany, Italy, and Japan combined have little uncertainty spillover effects on the rest of the world. An exception is China in the recent years, but most of the China-related uncertainty is due to trade tensions with the United States. That said, while other systemic economies have limited global uncertainty spillovers, they have important regional uncertainty effects—such as for example, Germany for the other European economies and China and Japan for several Asian economies.
By Saadia Zahidi
This article first appeared in Finance & Development magazine.
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