The Strategist

IIF: US, China keep borrowing, debt burden is growing

05/19/2020 - 03:00

The fight against the pandemic will result in a sharp increase in the global debt burden. In absolute terms, the total debt of governments, corporations, households and financial institutions will grow by almost a third by 2025 - up to $ 325 trillion, Washington Institute of International Finance (IIF) expects. Three quarters of this growth will be provided by the United States and China: in both countries, the rate of increase in borrowing amid the pandemic is already breaking records.

Due to COVID-19, global debt (of both states and households, corporations, financial institutions) will increase to $ 325 trillion from $ 255 trillion in 2019 - that is, $ 70 trillion by 2025, IIF forecasts. For comparison, last year, the total load increased by $ 11 trillion (up to 322% of GDP). 75% of debt growth by 2025 will fall on the United States and China.

Already this year, world debt grew by $ 14 trillion. A year ago over the same period, the growth was almost half of that. The increase was mainly in terms of public debt: in April it grew by $ 2.6 trillion (of which $ 1.5 trillion fell to the United States) - despite the fact that last year it grew by $ 1 trillion on average per month. A new record is likely to be set in May, the IIF believes. So, for the United States, the already adopted fiscal crisis prevention programs in the amount of $ 2.9 trillion will lead to an increase in public debt from 102% of GDP in 2019 to 120% this year, and to 140% of GDP - by 2025.

China is not far behind. This country has provided 40% of the total growth in global debt since 2007 (from 172% to 300% of GDP in 2019). Sooner or later, the heavy debt burden will become an obstacle for China to further increase borrowing, according to IIF. They note that in the first quarter of 2020, total debt in China grew to 317% of GDP - this is a record quarterly growth, two-thirds of which are explained by a drop in GDP, a third - by a direct increase in debt.

However, it is worth noting that the debt of other countries to China has been growing more rapidly than its own, from $ 875 billion in 2004 to $ 5.5 trillion in 2019 (this is equivalent to 6% of global GDP). In recent years, growth has been most pronounced in the segment of bank loans and short-term trade finance. However, most of the debt (equivalent to 4.5% of global GDP) still falls on portfolio investments, including the purchase of bonds in reserve currencies.