Heavy weight

Rising global debt levels pose growing economic and financial risks that governments, regulators, and companies alike must be prepared to grapple with in the year ahead, says the Organization for Economic Cooperation and Development (OECD).

In a new report, the OECD said the combined volume of sovereign and corporate bond debt almost reached US$100 trillion by the end of 2023 — about the same size as global GDP.

Within the OECD region, the government debt-to-GDP ratio reached 83% at the end of the year too — up 30 percentage points since the 2008 financial crisis, it noted.

And government bond debt for the OECD is projected to grow by another US$2 trillion this year to US$56 trillion. That would represent a US$30 trillion increase compared to 2008, it said.

At the same time, global corporate bond debt has grown from around US$21 trillion in 2008 to US$34 trillion, it reported — noting that over 60% of the increase is attributed to non-financial corporations.

Moreover, while central banks have absorbed a large share of the increased borrowing in recent years, they are now reducing their holdings as a part of quantitative tightening.

“This is increasing the net supply of bonds to be absorbed by the broader market to record levels,” the report said.

A substantial share of this debt will be maturing in the next three years, “adding to financing pressures, notably in emerging economies,” it said.

As a result, several highly-indebted countries, including OECD countries “may potentially face a negative feedback loop of rising interest rates, slow growth and growing deficits,” it said, “unless bold steps to enhance fiscal resilience are taken.”

Specifically, the report recommends that government spending needs to be more targeted, “with an increased focus on investments in areas that drive productivity increases and sustainable growth.”

And regulators “need to monitor closely both debt sustainability in the corporate sector and overall exposures in the financial sector,” it said.

According to the report, the risks are concentrated in certain segments of global debt markets, “including some advanced economies with elevated debt-to-GDP ratios, lower-rated low-income countries, and highly leveraged corporate issuers in some sectors, notably real estate.”

By the end of 2023, over half (53%) of all investment-grade corporate bonds by non-financial companies, was in the lowest-rated category, it said — more than double where the share stood in 2000, and the share of issuers that are highly leveraged has jumped sharply from 11% in 2008 to 42% in 2023.

“Risk-taking has increased substantially in all parts of the non-financial corporate sector,” it said.

“Given the decreasing quality of investment-grade bonds and the limited capacity of the market to absorb a large increase in non-investment grade supply, the implications of potential downgrades merit consideration,” the report said.

“A new macroeconomic landscape of higher inflation and more restrictive monetary policies is transforming bond markets globally at a pace not seen in decades,” said Mathias Cormann, secretary general of the OECD, in a release.

“This has profound implications for government spending and financial stability at a time of renewed financing needs,” he added.