The total of exceptional government and corporate bonds worldwide surpassed $100 trillion last year, the OECD reported on Thursday, as increasing interest costs present borrowers with difficult decisions, necessitating a focus on productive investments. Although central banks are currently lowering interest rates, borrowing expenses are still significantly higher than before the rate increases of 2022, resulting in ongoing replacement of low-rate debt and a probable rise in interest costs in the future. This arrives during a period when governments are confronted with substantial expenditure demands. This week, Germany's parliament endorsed a significant initiative to enhance infrastructure and back a wider European defence expenditure effort. Persistent expenses from the green transition and ageing populations are impending for major economies.
The OECD stated in its annual debt report that this mix of increased costs and elevated debt threatens to limit future borrowing abilities when investment demands are at an all-time high. From 2021 to 2024, interest expenses as a portion of output increased from the lowest to the highest levels seen in the past two decades. According to the report, interest costs remain lower than current market rates for more than half of OECD nations and almost a third of government debt in emerging markets, with just under two-thirds of high-grade corporate debt and nearly three-quarters of junk-rated corporate debt. Almost 50 per cent of the government debt from OECD nations and emerging markets and about one-third of corporate debt is all set to mature by 2027.
Countries with low incomes and high risks encounter the greatest refinancing challenges, as more than half of their debt is due within the next three years, with over 20 per cent maturing this year, according to the organization. As debt increases in expense, governments and corporations must guarantee their borrowing fosters sustained growth and productivity, stated Serdar Celik, head of capital markets and financial institutions at the OECD. "If they proceed this way, we have no concerns. If they don't proceed in this manner and incur extra, costly debt without enhancing the economy’s productive capacity, we will face tougher times ahead," stated Celik.
According to the OECD, companies have increased borrowing since 2008 for financial reasons such as refinancing or returning money to shareholders, while corporate investment has declined during this period.
The OECD stated that emerging markets reliant on borrowing in foreign currencies must enhance their domestic capital markets. The report indicated that the expenses associated with borrowing via dollar-denominated bonds increased from roughly 4 per cent in 2020 to over 6 per cent in 2024, climbing to above 8 per cent for more hazardous, junk-rated economies. These countries have faced challenges in accessing local sources of funds because of low savings rates and limited domestic markets. The OECD stated that financing the transition to net-zero emissions is an enormous challenge.
If public financing is used for the additional investments required for the transition, debt-to-GDP ratios could rise by 25 percentage points in advanced economies and 41 points in China by the year 2050. If financed through private means, the debt of energy firms in emerging markets, excluding China, must increase fourfold by 2035.
The OECD reported that foreign investors and households have taken central banks' place in reducing their bond holdings, currently owning 34 per cent and 11 per cent of domestic government debt in OECD economies, respectively, up from 29 per cent and 5 per cent in 2021. However, it cautioned that those dynamics might not persist. The OECD stated that increasing geopolitical tensions and trade uncertainties may result in swift shifts in risk aversion, potentially disrupting international portfolio flows.
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