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While higher interest rates are raising the cost of government borrowing, sovereign debt issuance is expected to remain high too, according to a new report from S&P Global Ratings.

The rating agency estimates that total sovereign borrowing will reach US$10.5 trillion this year, which is in line with last year, and remains almost 40% higher than the pre-pandemic historical average.

S&P said that this continued high level of government borrowing “will add negative pressures on sovereign credit quality.”

According to the report, high energy prices is one of the key reasons for still-elevated government borrowing, particularly in Europe.

“The double shock of the Covid-19 pandemic and high commodity prices (including for food and energy), initially triggered by the post-pandemic recovery and later amplified by the Russia-Ukraine war, have prompted governments around the world to roll out and maintain fiscal measures to soften the blow to households and businesses,” it said.

At the same time, these shocks have fractured domestic politics, which has made it harder for governments to rein in spending, it said.

“Coupled with elevated commodity prices and geopolitical uncertainty, including about the evolution of the Russia-Ukraine war, these macroeconomic conditions create a difficult backdrop for governments’ fiscal policies,” the report said. “If anything, sovereigns face another challenging fiscal year, further complicated by a more polarized social and political environment.”

This all comes against the backdrop of an expected slowdown in global growth, and continued high interest rates, this year. Despite signs of easing global inflation, “the world’s macroeconomic outlook in 2023 remains challenging,” the report said.

“As core inflation in advanced economies remains high, central banks will need to continue to raise rates and keep them high until 2024,” it said, adding that emerging markets are forecast to keep rates high too amid still-lofty inflation.

For emerging markets, the effective cost of servicing debt is also rising fast, it said, noting that this represents “a growing credit risk.”