EM debt: The good, the green and the ugly
Global debt reached a new record high of $303 trillion in 2021–China a key driver: After a sharp rise of some $33 trillion in 2020, the global debt pile increased by over $10 trillion in 2021. Over 80% of the rise came from emerging markets, driven largely by China. By sector, general government and non-financial corporates saw the largest increases (Table 1). Debt outside of the financial sector hit $233 trillion, up from $224 trillion in 2020.
Economic recovery and higher inflation help stabilize debt levels… Helped by economic recovery and higher inflation, the global debt-to-GDP ratio declined from an all- time high of over 360% in 2020 to 351% in 2021—still some 28 percentage points (%pts) above pre-pandemic levels (Chart 1). The biggest declines were seen in the mature market corporate sector, both non-financial corporates and financial institutions. Overall, fully 75% of the countries in our sample saw a decline in debt ratios last year. In contrast, Vietnam, Thailand, and Korea saw the sharpest increases in debt ratios (ex-financials, Chart 2).
…but EM debt is fast approaching $100 trillion: Total debt in emerging markets surged by some $8.5 trillion to over $95 trillion in 2021. At around 248% of GDP, the total EM debt-to-GDP ratio is still over 20 percentage points higher than its pre-pandemic level.
China saw the sharpest increases in the USD value of outstanding debt, which rose by some $7 trillion to $60 trillion in 2021 (more than the $5.3 trillion rise in the U.S. during that period). Still, at some 330% of GDP, total debt in China is around 6%pts lower than in 2020.
EM debt
EM government debt still above pre-pandemic levels; more off-budget borrowing: While the pace of ac- cumulation slowed in 2021, EM government debt levels re- main elevated. This slowdown is in line with the moderation in government budget deficits seen over the past year.
Yet, since the onset of the pandemic, some EM governments seem more reliant on off-budget borrowing, with different variations by country. For instance, state-owned enter- prises continue to play a role in the post-COVID recovery— contributing to the rise in non-financial corporate debt levels, particularly in China, Russia, and Saudi Arabia.
In some cases, domestic banks have been encouraged to acquire more government debt (Chart 3). During the same period, some EM central banks have also expanded their holdings of domestic government bonds in an effort to ease pressure on sovereign debt markets.
Emerging markets borrowing more in local currency: Most of the EM debt accumulation last year was in local currency, with FX debt making up only 2% of the rise in debt.
Excluding domestic bank lending, over 85% of gross issuance in bond and loan markets was in local currency highest since 2003.
However, the pandemic has sharply reduced foreign investors’ appetite for local currency assets. At just 18%, foreign participation in EM LC government bond markets is now at its lowest since 2009.
Emerging markets are entering the 2022 Fed rate cycle with record high refinancing needs: some $7 trillion of EM bonds/loans come due through end-2022— up from $5.5 trillion in 2021. FX redemptions are seen at some $1 trillion, with relatively high USD refinancing needs for China, UAE, Saudi Arabia, and Turkey.
Gross external financing needs are back to pre-pandemic levels, but high reliance on short-term funding and FX borrowing leaves some emerging markets more exposed to changes in market sentiment and rising short-term USD borrowing costs (Chart 4).
ESG debt issuance – boom time!
2021 saw robust growth in sustainable debt markets, with ESG-labelled issuance surpassing a new record of over $1.4 trillion, almost double the pace of 2020.
At around $3.4 trillion, ESG debt markets make up just 1% of global debt universe (bonds and loans). However, their share in global long-term debt issuance is increasing fast, up from 3% in 2020 to over 6.5% last year.
Our baseline scenario sees total global ESG debt issuance reaching $1.8 trillion in 2022 and near $3.8 trillion in 2025 (Chart 2). Under favorable market conditions, issuance could reach an annual pace of $7.2 trillion by 2025 (Chart 5)— Read more from IIF.