Investment Insights: The Rise in Global Debt
By Cliff Aque, CFA, Investment Strategist
Since the Great Financial Crisis (GFC), global debt has continued to rise. Looking at data from the Bank for International Settlements (BIS), we can see global debt levels have risen from 201% in 2008 to 244% in 2017. The increase has been particularly steep in emerging market (EM) economies, rising from 107% to 194% during the same timeframe. A large driver of this was China who saw debt levels increase from 141% to 256% of GDP.
While these high levels of debt are a cause for concern and something to be aware of, we do not see an imminent debt crisis in the near-term, particularly in developed economies. One reason is that debt service levels as a percentage of income have actually come down since the GFC across most developed countries according to BIS data. This is because interest rates have been low and corporate credit spreads have compressed, lowering costs for borrowers. The same cannot be said for several EM economies, so it is possible that there will be certain countries that run into problems.
Interest rates may continue to march higher over time, but they are starting from extraordinarily low levels. Debt service levels should remain manageable unless interest rates rise dramatically, which we view as unlikely. The equity markets seem less concerned about the long-term implications of high debt levels, while focusing on shorter-term issues like earnings growth, GDP growth, inflation, and interest rates.