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The Titanic passenger liner sank in 1912 after hitting in iceberg in the Atlantic Ocean. In advanced economies, public debt remains at levels not seen since World War II, while in emerging markets, public debt has accumulated to levels last seen during the 1980s debt crisis. Photo: NZME
Opinion
Macroscope
by Anthony Rowley
Macroscope
by Anthony Rowley

Titanic iceberg of world debt could sink a slowing global economy

  • Debt levels are rising and the fear is that much of the world’s debts are unrecorded, making for a bigger reckoning than official data suggests. This means a bigger crisis should the global economy slow down
In the same way that Wall Street and other markets have blithely shrugged off the threat of an all-out trade conflagration, they have paid little heed to the mountain of global debt. Yet alarm is spreading among officials and economists. Beyond the concern on absolute debt levels, the fear is that much lending may be unrecorded, suggesting an iceberg of debt more menacing than initially appears, especially where it is sold in securitised forms.

Debt crises have crept up on an unheeding world all too often and part of the reason has been the lack of transparency among private lenders – the true scale of debt became clear too late. Is the same about to happen again? Already, recorded debt levels suggest another crisis could occur as the global economy slows. Yet official data may not be telling the whole story.

In an attempt to address the debt knowledge gap, the Washington-based Institute of International Finance launched a series of voluntary debt transparency principles at the G20 meeting of finance ministers and central bank governors last weekend in Fukuoka, Japan.
Some commentators suggest that the aim of the principles is to track and prove the alleged iniquities of China’s “debt-trap diplomacy” when in reality, most of the lending for its Belt and Road Initiative is by Chinese state-backed institutions. Organisations such as the International Monetary Fund, World Bank and Paris Club already have frameworks to keep track of such sovereign and semi-sovereign debt.
The new debt transparency principles aim to lift the veil on private debt. There is good reason to make this a priority, not least in Asia, where corporate and household indebtedness is much higher than in the rest of the world. Corporate debt in emerging Asia, excluding Japan, was equal to 121 per cent of gross domestic product at the end of 2018, much higher than anywhere else in the world, according to the Institute of International Finance.
In China, corporate debt has risen to 1½ times the size of its economy. Photo: AP

Corporate debt was about 150 per cent of the GDP in China, nearly 100 per cent in South Korea, and 221 per cent in Hong Kong, in a reflection of its relatively smaller economy. Corporate debt levels were also high in Malaysia, the Philippines and Thailand.

Asia also leads in household debt, which makes up 48 per cent of the region’s GDP, a far higher level than for other developing regions. Household debt makes up 98 per cent of GDP in South Korea, followed by 50 per cent in Thailand, Malaysia and China.

In contrast, Asia is relatively thrifty with government debt. Most Asian governments manage to keep their debt levels to 50 per cent of GDP – in contrast to Japan’s 225 per cent – and just half of government debt levels in the United States and Europe.

Japan’s government debt is a stand-out in Asia, at more than twice the size of its economy. Photo: Kyodo

Emerging markets hold US$67 trillion of debt altogether, of which US$5.3 trillion are in foreign currencies. This “poses significant risk to borrowers when their currencies weaken against the dollar or euro”, said former Institute of International Finance executive managing director Hung Tran, noting that foreign currency debt is notably high among South Korean, Malaysian, Thai and Indonesian corporate borrowers.

Higher debt levels means a greater reliance on low interest rates, he noted. Together with low inflation rates, this has prompted major central banks to extend the “low for long” rate policy, building up more debt and a bigger correction down the road.

Era of cheap loans to return as central banks set to cut rates

Global debt – across the corporate, household, government and financial sectors – is “getting close to US$250 trillion, or approximately 317 per cent of global GDP”, according to the Institute of International Finance chief executive Tim Adams. “It has risen by some US$70 trillion since the [2008] crisis, and nearly half of that is due to governments taking on more debt.”

To put this in perspective, in advanced economies, public debt remains at levels not seen since World War II, while in emerging markets, public debt has accumulated to levels last seen during the 1980s debt crisis.

Markets seem to believe that in a low interest-rate environment, the growing iceberg of debt poses no risk to the passage of the Titanic global economy. But these same low rates will offer little comfort if corporate earnings and wages are hit by trade tensions and sliding economic growth. We can only hope that the Titanic does not sail into the iceberg.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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