Slowing economic growth is driving up global debt levels, especially in emerging markets, the Institute of International Finance (IIF) said on Wednesday, warning of a significant rise in corporate bankruptcies in the future.
The global debt-to-GDP ratio, a widely used measure of a borrower’s ability to meet its obligations, rose to 350% in five quarters, its first rise in the period, the IIF said.
In emerging markets, that proportion rose by almost 3.5 percentage points, to 252% of the Gross Domestic Product (GDP), which is reflected “in a greater impact of slowdown” in the economy.
“Inflationary pressures have not been high enough to reduce debt ratios,” Emre Tiftik of the IIF said in a report from the agency.
The rise comes despite an overall decline in global debt, which fell from $5.5 trillion to $300 trillion in the three months to the end of June, the first quarterly decline since 2018.
Debt in advanced markets fell by $4.9 trillion to just over $201 trillion, while a proportionally smaller decline in emerging markets brought the total in developing economies to $99 trillion.
The decrease in the total amount of debt was driven by the dollar’s advance to near 20-year highs against other currencies, as well as a slowdown in new issues.
A toxic mix of inflation fueled by rising energy and food prices has led authorities to raise interest rates globally in recent months, which in turn has amplified global recession risks. Meanwhile, governments have increased spending to shore up economies in the face of the energy shock.
The report forecasts that the global debt-to-GDP ratio will increase by another 2 percentage points by the end of the year.
The data shows that through August, government bond issuance so far in 2022 was down 20% from the same period in 2021. Sovereign debt fell to $85.8 trillion, but rose 21% from 70 .7 trillion dollars in the first quarter of 2020, according to the report, which highlighted the increases in fiscal stimulus during the pandemic.
Upward pressure on borrowing costs will continue as the US Federal Reserve is expected to raise its benchmark rate by at least 75 basis points next week.
“A significant rise in (corporate) bankruptcies could unfold as borrowing costs rise, making it quite difficult for central banks to engineer a soft landing without adverse implications for labor markets,” the IIF said.