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Global public debt set to soar to $71 trillion this year: research

People wearing protective face masks wait at a bus stop with a display of the current national debt amid the coronavirus disease (COVID-19) pandemic in Washington, January 31, 2022.

Sarah Silbiger | Reuters

LONDON — Global sovereign debt is expected to climb 9.5% to a record $71.6 trillion in 2022, according to a new report, while new borrowing is also expected to remain elevated overall.

In its second annual sovereign debt index, released on Wednesday, British asset manager Janus Henderson predicted a 9.5% rise in global government debt, driven mainly by the United States, Japan and China, but the vast majority of countries needing to increase their borrowing.

Global public debt jumped 7.8% in 2021 to $65.4 trillion as every country assessed saw its borrowing increase, while debt-servicing costs fell to a record $1.01 trillion. dollars, an effective interest rate of just 1.6%, according to the report.

However, debt servicing costs are expected to rise significantly in 2022, climbing around 14.5% at constant exchange rates to $1.16 trillion.

The UK will feel the greatest effect due to rising interest rates and the impact of soaring inflation on the substantial amounts of UK indexed debt, as well as the costs associated with unwinding the Bank of England’s quantitative easing program.

“The pandemic has had a huge impact on government borrowing – and the aftermath is likely to continue for some time to come. The unfolding tragedy in Ukraine is also likely to put pressure on Western governments to borrow more to finance increased defense spending,” Bethany said. Payne, portfolio manager for global bonds at Janus Henderson.

Germany has already pledged to increase defense spending to more than 2% of GDP in a sea change in policy since Russia’s invasion of Ukraine, while committing 100 billion euros (110 billion dollars) into a fund for its armed forces.

New sovereign borrowing is expected to reach $10.4 trillion in 2022, nearly a third above the average before the Covid-19 pandemic, according to S&P Global Ratings’ latest Global Bond Report released on Tuesday.

“We expect borrowing to remain elevated, driven by high debt refinancing needs, as well as fiscal policy normalization challenges posed by the pandemic, high inflation, and polarized social and political landscapes,” said Karen Vartapetov, credit analyst at S&P Global Ratings.

The global macroeconomic repercussions of the ongoing conflict are expected to put additional upward pressure on government financing needs, while tighter monetary conditions will increase government financing costs, the report points out.

This poses an additional headache for sovereigns who have so far struggled to revive growth and reduce their reliance on foreign currency funding, and whose interest bills are already substantial.

In advanced economies, borrowing costs are expected to rise but will likely remain at a level that will give governments time to consolidate their budgets, S&P said, offering governments time to consolidate their budgets and focus on boosting reforms. the growth.

Opportunities for investors

Monetary policy convergence emerged as a theme in the first two years of the pandemic, as central banks lowered interest rates to historic lows to help prop up struggling economies.

However, Janus Henderson noted that divergence is now emerging as a key theme, as central banks in the US, UK, Europe, Canada and Australia seek to tighten policy conditions to contain the crisis. inflation, while China continues to try to stimulate the economy with a more accommodating policy.

This divergence provides opportunities for investors in short-term bonds that are less sensitive to market conditions, Payne suggested, pointing to two locations in particular.

“One is China, which is actively engaging in monetary policy easing, and Switzerland, which is better shielded from inflationary pressures because energy occupies a much smaller percentage of its inflationary basket and their policy is linked, but overdue, to the ECB,” she says.

Janus Henderson also thinks that short-dated bonds look attractive at the moment compared to riskier long-dated bonds.

“When inflation and interest rates rise, it’s easy to dismiss fixed income as an asset class, especially since bond valuations are relatively high by historical standards,” Payne said.

“But the valuation of many other asset classes is even higher and investors’ weighting in government bonds is relatively low, so there is an upside to diversifying.”

Moreover, she argued, markets have mostly priced in higher inflation expectations, so bonds bought today are enjoying higher yields than they would have been a few months ago. .

Correction: The title of this story has been updated with the correct figure for global public debt.