Global government debt reached USD66 trillion (converted at market exchange rates) at end-2018, nearly double its 2007 level and equivalent to 80% of global GDP, according to Fitch Ratings‘ new Global Government Debt Chart Book.
Developed market (DM) government debt has been fairly stable in US dollar terms, at close to USD50 trillion since 2012. In contrast, Emerging market (EM) debt has jumped to USD15 trillion from USD10 trillion over the same period, with the biggest increases in percentage terms being in the Middle East and North Africa (104%) and Sub-Saharan Africa (75%), though these regions still have comparatively low debt stocks, at less than USD1 trillion each.
“Government debt levels are high, leaving many countries poorly positioned for financial tightening as global interest rates begin to move higher,” said James McCormack, Global Head of Sovereign Ratings at Fitch.
While there are only 11 sovereigns rated ‘AAA’, they account for about 40% of global government debt, virtually unchanged over the last two decades. The US (AAA/Stable) is by far the world’s most indebted government in dollar terms, with consolidated general government obligations close to USD21 trillion. US debt is going up by about USD 1 trillion per year. To put that into perspective, the total debt stocks of France (AA/Stable), Germany (AAA/Stable), Italy (BBB’/Negative) and the UK (AA/Negative) were all in the range of USD2.4 trillion-USD2.7 trillion at end-2018.
Consistent with the dominance of ‘AAA’ sovereigns, 93% of global government debt carries an investment grade (BBB- or higher) rating. The ‘A’ category is the second-largest, as Japan (A) and China (A+) are the second- and third-largest government debt markets, with outstanding stocks of USD12 trillion and USD6 trillion, respectively.
The number of sovereigns rated in the ‘B’ category (or lower) has increased sharply in recent years, as several ‘BB’ commodity exporters were downgraded as they struggled with the correction in commodity prices, and the exceptionally low interest rate environment attracted new, less creditworthy, sovereigns to capital markets for the first time. Even so, sovereigns in the ‘B’ category (or lower) account for 28% of the rated portfolio but only 3% of global government debt.
There has been a steady deterioration in the credit quality of government debt in recent years. In DMs, the average rating (weighted by the sovereigns’ debt stocks in dollar terms) of outstanding government debt was just under ‘AA’ at end-2018, losing one notch since 2011. In EMs (excluding China), the average rating at end-2018 was slightly below ‘BB+’, its lowest since 2005.
Estimated effective interest rates faced by governments (calculated as interest payments divided by the debt stock) have drifted lower since 2000 in all regions and rating categories. The lowest effective rates by rating are found in the ‘A’ category, largely reflecting conditions in Japan, and the highest effective rates by region are in Latin America, as has been the case since 2010.
“In 2018 there were more upgrades than downgrades but, based on where we have negative rating outlooks, we believe 2019 looks less favourable, especially for the Latin America and Middle East and Africa regions,” added McCormack
“Common themes that have driven sovereign ratings in the last few years will dominate again in 2019, including tightening sovereign financing conditions, commodity price fluctuations and political and geopolitical developments. Slowing economic growth in some countries may bring fiscal concerns back to the fore, particularly given the high starting positions with respect to government debt,” said McCormack.
