Global debt is estimated to have reached a record high in the second quarter of 2023. At an estimated $307-trillion (R5.815-quadrillion), this number has continued to escalate from the pandemic-induced lift in 2020 and now equates to about 336% of global GDP.
Of this global debt stock, public debt accounts for about 40% but has nevertheless accelerated at the fastest pace.
More importantly, the lift in total global debt is at a time when economic growth has weakened by about 20% relative to the average between 2010 and 2019. This suggests that the growth in demand for savings is faster than the pace at which savings are being generated, raising both the debt pile as well as the price of accessing available savings. With benchmark interest rates at the highest since the global financial crisis, the age of cheap money is behind us, and interest costs are compounding leverage.
As the globe navigates liquidity needs — with households and businesses attempting to circumvent the cost-of-living crisis, regional conflicts, growing trade barriers and climate change — some economies will be more exposed than others. The pressures on available savings will result in higher interest rates.
While advanced economies have driven more than 80% of the debt accumulated in 2023, they enjoy safer-haven status, which allows them access to credit at lower rates. Many emerging and low-income markets do not enjoy the same privilege, having insufficient buffers and shallower capital markets. These countries carry a higher risk premium, which is worse for non-investment-grade economies such as SA.
This raises vulnerability to debt distress during crisis periods (Zambia and Pakistan being examples) and highlights the importance of a country knowing where in the spectrum it lies. There is ultimately no point in building up debt that taxpayers cannot service efficiently, thus reducing the probability of consolidation and worsening credit ratings.
Emerging markets are being prompted to implement structural reforms to improve macroeconomic outcomes, mobilise revenue, promote private sector investment, alleviate socioeconomic and climate challenges, and ultimately raise the standard of living to something that resembles advanced markets.
This has proved difficult to achieve as priorities are often consumed by near-term pressures, and relatively short-lived political cycles have not been helpful. The vicious circle of consumption borrowing has slowly eroded the capacity to borrow towards long-term objectives.
For example, SA’s poor fiscal and macroeconomic track record over the past decade has resulted in a higher long-term yield on bonds (the government’s cost of borrowing) and any economic shock compounds this problem. The National Treasury estimates that a 1% increase in inflation and interest rates, combined with a R1 depreciation against the dollar results in a R54bn increase in gross loan debt and an R8.2bn increase in annual debt service costs.
Therefore, a country such as SA must consolidate state coffers as a short-term pain that will usher in stability over the long term. This will be through a lower cost of funding, easier access to capital and a promotion of the investment drive, higher potential economic growth and development.
• Matikinca-Ngwenya is FNB chief economist.
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