Global Debt on the Decline due to Stronger Growth and Inflation

According to the Institute of International Finance (IIF), the nominal value of global debt decreased by $4 trillion in 2022, falling below $300 trillion, primarily due to stronger growth in the global economy and a sharp rise in borrowing costs. This decline marks the first annual decrease since 2015. The report states that mature markets have experienced the sharpest drop, including Cyprus, Norway, and the United Kingdom. The global debt-to-GDP ratio subsequently fell by 12 percentage points to 338% at the end of last year.

While this news is positive, the IIF analysis also suggested that the fourth quarter of 2022 may have marked an inflection point, with emerging markets continuing to experience a rise in debt. Despite a sharp rise in borrowing costs, emerging market debt hit a new high of $98 trillion last year, which is in stark contrast to developed markets. This increase was helped heavily by borrowings in China and Singapore.

While the retrenchment in debt values was primarily driven by mature markets, central banks in China and Japan provided substantial market liquidity. The IIF estimates that the global debt pile increased by over $10 trillion in the fourth quarter, partially reducing the large declines in debt levels recorded over the previous quarters in 2022.

Although the IIF said that fears of a global slowdown cut corporate borrowing in most parts of the world, the strength of the US economy encouraged US non-financial corporate debt, hitting over $20 trillion in 2022. Unfortunately, it still increased by over $1.7 trillion from 2021 levels; this marks the largest annual increase on record.

Overall, better economic data in Q3 of 2022, reduced inflation, and the reopening of the Chinese economy have given rise to better economic prospects for 2021. The International Monetary Fund has accordingly increased its estimate for global economic growth to 2.9% for this year.

The decline in global debt gives markets some much-needed breathing room with a shrinking debt-to-GDP ratio, although more needs to be done to reduce debt levels and stimulate growth in emerging markets.