Global debt sustainability worsened: emerging markets reached record numbers

Global debt sustainability worsened for the first time in a yearaccording to a report published by the Institute of International Finance (IIF) this Tuesday. In addition, Liabilities in emerging markets reached a record levelaffected by the decision of the United States Federal Reserve (Fed) to delay lowering interest rates.

He debt/production ratiowhich describes a borrower’s ability to meet its financial obligations, grew by 333% in the first quarter of 2024, after three consecutive quarters of decline.

In absolute terms, global debt reached US$315 trillion in the first quarter of 2024, US$1.3 trillion above the previous record. In emerging markets a record figure of more than US$105 trillion was verifiedwhich has more than doubled in the last decade, according to IIF data.

Among the emerging economies that contributed the most to this increase are China, India and Mexico. In contrast, South Korea, Thailand and Brazil recorded the largest declines among the subgroup.

It was expected that interest rates had begun to fall in the United States, but persistent inflation has caused the Federal Reserve to stay the course and continue without reducing the cost of credit.

This has resulted in rising borrowing costs around the world and, for many emerging markets, a weakening currencies that further aggravate the cost of debt service and “could bring tensions over public debt back to the fore”stated the IIF.

“Government budget deficits remain higher than pre-pandemic levels and are expected to contribute around $5.3 trillion to global debt accumulation this year,” the IIF said in a statement. “Increased trade frictions and geopolitical tensions also present significant potential headwinds for debt markets.”

Egypt and Pakistan are seen as the emerging economies where interest expenditure on public debt will be highest through 2026, with Pakistan set to spend more than 50% of income on interest and Egypt more than 60%.

Among developed economies, the United States and Japan saw debt rise the fastest, at 17 and 4 percentage points respectively.

According to the IIF, Japan will continue to spend on average less than 2% of public revenue on debt service until 2026. In the United States, the figure is expected to exceed 10% from the current 8% and touch 12% in the same period.

Last month, the International Monetary Fund warned that the level of US spending is “particularly concerning” and “not in line with long-term fiscal sustainability.”