While the heavy financing needs of advanced economies is alarming, there are a number of emerging market and middle-income economies that have financing needs in excess of 10 percent of their GDP in 2018 and 2019. These include Argentina, Brazil, Egypt, Hungary, Pakistan and South Africa.
Confidence in sovereign creditworthiness becomes increasingly important as heavily indebted governments will need to roll over debt. The IMF notes that “market access could be disrupted if global financing conditions tighten abruptly or if there is a shift in investor sentiment.” And investors have become more skittish.
Second, what the IMF and others are urging is that governments begin to make more serious efforts to bring fiscal deficits under control, especially since the global economy is still growing. As the IMF notes: “the optimal policy in normal times is to reduce debt ratios gradually but persistently in anticipation of future large negative events.”
Considering that the U.S. economic expansion is already one of the longest in the postwar era, being extended by the tax cut, the United States has gained one year or perhaps two more years of growth before a recession hits. However, IMF projections for U.S. government debt are set to increase from 108.0 percent of GDP in 2018 to 111.3 percent in 2020. Japan carries the highest debt load, equal to 236.0 percent in 2018 and set to fall to 232.0 in 2020 (though much of it is held by domestic investors less likely to dump it in the case of a financial market shock). Other major government debtors, like France and Italy, are set to decline, but their burdens remain substantial.
The issue of public sector debt and fiscal deficits is something that has faded from policymaking circles in Washington. Ironically the Republicans used to be the party that advocated for prudent fiscal policies, yet the Grand Old Party is presiding over one of the largest debt buildups in U.S. history. The problem is that the largest contributor to U.S. deficits and debt is mandatory spending for entitlement programs such as Social Security, Medicare, Medicaid and other income assistance programs. Tackling entitlement spending is not a politically popular approach. But the consequences of not taking action as debt climbs ever higher are going to be a problem, especially when the next recession sets in. As 2018 is an election year, the likelihood of any action on this front is exceedingly low. Moreover, if the Democrats retake the House—and possibly the Senate—chances of action on this front also remain low.
The IMF has clearly sounded the alarm on the issue of rising debt. There remains time to take action, but the political landscape is a problem for tackling such matters—not only in the United States, but in many countries around the world, such as China (where is the issue is corporate debt), Italy and Japan. This issue is not going to go away, but will increasingly reappear to bedevil markets as prospects for the next recession come closer and closer.
Scott B. MacDonald is a Senior Managing Director at KWR International. The views expressed here are his own and do not necessarily represent those of KWR International.