By G. Sharmila
On the surface, the global financial crisis is a thing of the past. However, recent research by the McKinsey Global Institute has unearthed a new problem: mounting global debt is outpacing world GDP growth. How concerned should the man on the street be?
_____________________________________________________________________
Although seven years have passed since the global financial crisis, global debt and leverage have continued to balloon. From 2007 through the second quarter of 2014, global debt grew by US$57 trillion, raising the ratio of global debt to gross domestic product (GDP) by 17 percentage points to US$199 trillion (RM734.7 trillion or 286% of global GDP (see Figure 1).
This was a key finding by the McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company. In its recent report Debt And (Not Much) Deleveraging, MGI said that while the amount of debt is not as much as the 23-point increase in the seven years before the global financial crisis, it is enough to raise fresh concerns.
So why is rising global debt worrying to the man on the street? As MGI pointed out in its report, high levels of debt — whether government or private sector — are associated with slower GDP growth in the long term. Highly indebted countries are also more likely to experience severe and lengthy downturns in the event of a crisis, as consumption and business investment plunge.
“Indeed, the latest research demonstrates how high levels of debt lead to a vicious cycle of falling consumption and employment, causing long and deep recessions,” MGI said.
“Governments in advanced economies have borrowed heavily to fund bailouts in the crisis and offset falling demand in the recession, while corporate and household debt in a range of countries continues to grow rapidly,” MGI observed in its report.
According to the report, rising government debt in advanced economies contributed to one-third of the overall global debt growth, as falling tax revenue and the costs of financial-sector bailouts raised public sector borrowing.
What’s alarming is that the report shows that the growing debt of developing economies accounts for half of the growth. China for instance, has seen its total debt quadruple since 2007, reaching US$28 trillion, which is 37% of growth in global debt.
Nearly all countries have increased leverage
According to the MGI report, since the global financial crisis, no major economy and only five developing ones have reduced the ratio of debt to GDP (Figure 2). However, 14 countries have increased total debt-to-GDP ratios by more than 50 percentage points.
“In a range of countries, including advanced economies in Europe and some Asian countries, total debt now exceeds three times GDP. Japan leads at 400 percent of GDP, followed by Ireland, Singapore, and Portugal, with debts ranging from 350 to 400 percent. Belgium, the Netherlands, Greece, Spain, Sweden and Denmark all have debt exceeding 300% of GDP,” the report said.
However, MGI noted that the high levels of debt in some of these countries are explained by the role as business hubs and not necessarily a sign of heightened risk.
One example is Singapore. “As a major business hub, Singapore has the highest ratio of non-financial corporate debt in the world, at 201% of GDP in 2014, almost twice the level of 2007. However, nearly two-thirds of companies with more than US$1 billion in revenue in Singapore are foreign subsidiaries. Many of them raise debt in Singapore to fund business operations across the region, and this debt is supported by earnings in other countries,” MGI explained.
Singapore, MGI said, has very high financial sector debt as well (246% of GDP), which reflects the presence of many foreign banks and other financial institutions that have set up regional headquarters there.
Growing government debt has offset private sector deleveraging
According to MGI, government debt grew by US$25 trillion between 2007 and mid-2014, with US$19 trillion of that in advanced economies. Growth in public sector debt has offset private sector deleveraging in the few countries that private sector deleveraging has taken place.
MGI pointed out also that in only four advanced economies (Germany, Spain, the United Kingdom, and the United States) have private-sector debt (debt of households and corporations) declined in relation to GDP.
“In a broad range of countries — including Sweden, France, Belgium, Singapore, China, Malaysia and Thailand — private sector debt has grown by more than 25 percent of GDP since the crisis. This raises fundamental questions about why modern economies seem to require increasing amounts of debt to support GDP growth and how growth can be sustained,” MGI opined in its report.
Emerging market debt has grown
Developing countries have accounted for 47% of growth in global debt since 2007 — more than twice their 22% share of debt growth from 2000 to 2007 (Figure 3). However, they started from very low levels of debt in 2007. “On average, their debt is just 121% of GDP, less than half the 280% average in advanced economies,” MGI said. (See Figure 4 to compare the debt of advanced and developing economies).
“Recent growth in emerging-market debt mainly reflects healthy financial deepening. Rapid urbanisation, industrialisation, and building of much-needed infrastructure have generated significant demand for credit in developing economies. The financial systems in these countries are expanding to meet this demand. A broader range of companies and households now have access to formal banking systems, and corporate bond markets have emerged in some countries,” MGI explained.
It added that part of the growth in debt in emerging markets has been funded by foreign creditors. In fact, according to MGI, the share of emerging-market bonds owned by foreign investors more than doubled from 2009 to 2013, rising from US$817 billion to US$1.6 trillion, a growth rate of 19% a year. “This reflects investors’ search for higher yields than those offered by the ultra-low interest rates on bonds in advanced economies,” MGI observed.
In our next article, we discuss the global household debt situation as observed by MGI and how developing economies (including that of Malaysia) factor into this equation.
Tomorrow: Rising household debt worrisome
You must be logged in to post a comment.