The global debt reached a record $315 trillion ($250 trillion), as China and India continued to borrow despite geopolitical tensions, higher interest rates and other risks.
The Institute of International Finance warned that the post-pandemic effort to reduce debt was coming to an ending as governments cut taxes while increasing spending in light of a record number of election this year.
The report said that the debt increase in emerging markets was “driven primarily by” an “unprecedented high of more than $105 trillion”.
China, India, and Mexico have seen the largest increases in this year.
China has already been dealing with an economic crisis for many years.
The International Monetary Fund has warned that India could have a debt load larger than its GDP by the end of this decade, as it spends billions each year on dealing with natural catastrophes.
IIF analysis revealed that total world debt increased by $1.3 trillion, reaching a record $315 trillion for the first three month of the year. Global debt-to GDP “resumed [its] upward trajectory” following a sustained fall after Covid locksdowns.
IIF also added that the increase in interest rates among advanced economies was due to the increased government debt in the first quarter of 2024, as the stubborn US inflation rate threatens to continue the trend.
In its latest debt monitoring, the IIF stated that “given the’sticky” US inflation, and an anticipated delay in Federal Reserve rate reductions, a dollar rallie could once again put government debt pressures on the forefront, especially for developing countries.”
The report warned that US president Joe Biden presided over a debt heap that was growing, while households in the largest economy of the world were repaying money owed for personal loans and credit card debt.
The report said that while household balance sheets are healthy, they should be able to cushion higher rates for longer periods of time. However, the government’s budget deficits remain higher than before the pandemic and are expected to contribute $5.3 trillion this year to the global debt accumulation.
The IMF warned governments last month to avoid the temptation of cutting taxes or increasing spending to win votes in “the biggest-ever election year”.
The statement: “In this year of great elections, governments must exercise fiscal restraint in order to maintain sound public finances.”
IIF, a banking lobby group, also warned that “increasing trade frictions and further geoeconomic fragmentation” could reduce the ability of emerging markets to service their external debts. This is because many developing countries struggle with debts in dollars.
The report said that “although the relatively optimistic near-term economic outlook for the global economy is a positive element in debt dynamics, persistent inflation, especially in the US continues to pose an important risk, increasing global funding costs.”
Rising trade frictions and geopolitical tensions are also significant headwinds to the debt markets. China’s goal to be the leading provider of clean energy technologies in the world could lead to tighter supply chains, fueled by industry-specific policies that are protectionist. This would keep inflation and interest rates at pandemic levels. This scenario would further undermine trade and investments flows, and reduce the capacity of frontier and emerging markets to service their external debt.