Record global debt levels put developing countries at risk

Rising sovereign debt levels around the world are seen to be taking a toll on macroeconomic stability, just as squeezed government finances create particular risks for developing countries.The global debt-to-GDP ratio rose for the first time since 2020 last year, as the world’s debt stock hit a fresh year-end record of $318tn and economic growth slowed, according to the Institute of International Finance.The $7tn rise in global debt was less than half of the 2023 increase, when expectations of Federal Reserve interest rate cuts sparked a borrowing surge.But the IIF warned that so-called bond vigilantes could punish governments if rising fiscal deficits persist.Debt-to-GDP – an indicator on the ability to repay debt – approached 328%, a 1.5 percentage point increase, as government debt levels of $95tn clashed with slowing inflation and economic growth.The IIF said it expects debt growth to slow this year, amid unprecedented global economic policy uncertainty and still-elevated borrowing costs.It warned, though, that despite high borrowing costs and economic policy uncertainty, their forecast of a $5tn increase in government debt this year could rise due to calls for fiscal stimulus and larger military spending in Europe.Emerging markets, driven by China, India, Saudi Arabia and Turkiye, accounted for roughly 65% of the global debt growth last year.This borrowing, along with a record $8.2tn in debt that emerging markets need to roll over this year – 10% of it in foreign currency – could strain countries’ abilities to weather looming political and economic storms."Heightened trade tensions and the Trump administration’s decision to freeze US foreign aid, including cuts to USAID, could trigger significant liquidity challenges and curb the ability to roll over and access to FX debt,” the IIF report said. "This underscores the increasing importance of domestic revenue mobilisation to build resilience against external shocks.”The debt crisis facing the world’s poorest economies is reaching new highs and debt servicing is eating up a growing share of revenues at the expense of spending on development, the United Nations Development Programme warned last week.Interest payments on debt exceeded 10% of government revenue in 56 developing nations – almost twice the number of countries compared to a decade ago, according to the UNDP report.Of those, 17 countries spent more than 20% of revenue on interest payments – surpassing a threshold strongly linked to default risk, UNDP said. Rising debt service burdens had surpassed levels not seen in more than two decades, it said.Growing external debt burdens are crippling the world’s poorest countries, a group of former African leaders has warned as they pushed for a new programme of collective relief from private, bilateral and multilateral creditors.Currently, there are over 50 developing countries that spend more than 10% of total revenues on debt servicing costs, according to UN Trade and Development. UNCTAD estimates that 3.3bn people live in countries that spend more on debt interest than on education or health.High levels of debt are already having an impact on stability around the world. In Kenya, for instance, deadly protests erupted this summer after the government attempted to raise taxes to mitigate a debt crisis that saw interest payments swell to absorb almost 60% of total government revenues.In a wider sense, public debt can be vital for development as governments use it to finance their expenditures, protect and invest in their people, and to pave their way to a better future. However, it can also be a heavy burden, when public debt grows too much or too fast as it is happening today across the developing world.