Global Debt Surges to Record High in 2023, Posing Economic Challenges

Global debt reached a record-breaking $307 trillion in the first half of 2023, primarily fueled by increased liabilities in advanced economies. This substantial amount, equivalent to 3.3 times the global economic output, exceeds levels from a decade ago by $100 billion. Notably, nearly one-third of this debt constitutes public debt, raising concerns as government interest expenses surge, while the international financial system appears ill-equipped to manage unsustainable debt burdens, according to a report by the Institute of International Finance (IIF).

The IIF’s report also highlighted that the total debt, encompassing government, household, non-financial corporate, and bank debt, amounted to 336 percent of the global gross domestic product (GDP). This figure represents a slight uptick from the 334 percent recorded at the end of 2022. Despite some moderation in this indicator attributed to inflation, with inflationary pressures on wages and prices easing, the IIF predicts this measure will exceed 337 percent by the close of 2023.

The lion’s share of the debt accumulation in the first half of 2023, exceeding 80 percent, emanated from mature markets, with significant contributions from the United States, Japan, the United Kingdom, and France. Among emerging markets, the most substantial increases were noted in China, India, and Brazil.

Regarding Mexico, the IIF reported that the collective debt of the government, households, non-financial corporations, and banks equates to 87 percent of the country’s GDP. Broken down, household debt accounts for 16.7 percent of Mexico’s economic output, corporate debt represents 22.6 percent, government debt stands at 38.9 percent, and financial sector debt amounts to 8.8 percent.

Concerns persist regarding emerging market debt, with the IIF cautioning that tensions persist. As international financing costs stabilize at higher levels, public debt in emerging markets (excluding China) has been on the rise since the second half of the previous year.

In 2023, sovereign debt issued in domestic markets has decreased, with emissions lagging behind last year’s figures by 20 percent. However, this decline is coupled with the fact that debt interest payments in local currency now account for over 80 percent of the financial cost of public borrowing, a worrisome situation in many countries.

The global financial system appears ill-equipped to handle the risks associated with domestic debt market tensions. Establishing a market-based framework to address unsustainable levels of domestic debt could facilitate efforts to mobilize resources for development finance, including climate finance. The IIF emphasized that progress in this regard largely depends on reforms by multilateral development banks.

Additionally, the IIF pointed out a notable slowdown in bank credit due to factors such as high inflation, increased borrowing costs, and stricter credit standards, further shaping the evolving global financial landscape.