The global debt-to-GDP ratio increased for the first time since 2020, reaching a record $318 trillion at the end of last year, according to a report from the Institute of International Finance (IIF). Slowing economic growth and rising fiscal deficits contributed to the uptick, raising concerns about market reactions and future policy direction.
Despite the $7 trillion increase in global debt, the rise was significantly lower than in 2023, when expectations of Federal Reserve rate cuts spurred a wave of borrowing. However, the IIF cautioned that bond vigilantes could penalize governments if fiscal deficits continue to expand.
"Heightened scrutiny of fiscal balances, especially in politically polarized economies, has been a defining trend in recent years," the IIF noted.
The report highlighted the market’s reaction to fiscal policies, pointing to the collapse of UK Prime Minister Liz Truss’s tenure in 2022 and similar pressures that led to the resignation of France’s Prime Minister Michel Barnier last year. With government debt reaching $95 trillion, the debt-to-GDP ratio climbed to 328%, up 1.5 percentage points, as slowing inflation and economic growth created additional pressures on repayment capacity.
Looking ahead, the IIF expects the pace of debt accumulation to slow in 2024 due to ongoing global economic policy uncertainty and persistently high borrowing costs. However, the organization warned that government debt could rise beyond its current forecast of a $5 trillion increase this year if fiscal stimulus measures and heightened military spending in Europe materialize.
"We anticipate greater volatility in sovereign debt markets, particularly in countries with high political polarization," said Emre Tiftik, the IIF’s director of sustainability research.
Rollover Challenges and Emerging Market Risks
Emerging markets, led by China, India, Saudi Arabia, and Turkey, accounted for approximately 65% of last year’s global debt increase. This debt surge, coupled with a record $8.2 trillion in maturing obligations that emerging markets need to refinance in 2024—10% of it denominated in foreign currency—could pose liquidity risks and heighten financial instability.
The IIF warned that geopolitical factors, including trade tensions and potential cuts to U.S. foreign aid, could further strain emerging markets' ability to roll over debt. "The increasing importance of domestic revenue mobilization to build resilience against external shocks cannot be overstated," the report emphasized.
Tiftik added that the high volatility underscores the need for multilateral development banks to enhance their ability to attract private capital. Many developing economies, such as Kenya and Romania, are struggling to boost domestic revenue due to public opposition to tax hikes and the impact of upcoming elections.
Implications for Wealth Advisors and RIAs
For wealth advisors and RIAs, the evolving debt landscape presents key considerations for portfolio management and risk assessment. Elevated debt levels, coupled with potential fiscal instability, could impact sovereign bond markets, currency valuations, and global capital flows.
Investors should closely monitor sovereign credit risk, particularly in highly leveraged economies facing political uncertainty. The shift in global monetary policy, particularly the trajectory of interest rates and inflation, will be crucial in assessing fixed-income allocations and broader investment strategies. Additionally, the growing importance of emerging markets in global debt accumulation suggests a need for caution in allocating capital to these regions, given their heightened vulnerability to external shocks.
The evolving macroeconomic environment underscores the necessity of diversified investment strategies that account for potential volatility in sovereign debt markets. As fiscal policies and geopolitical dynamics continue to shape global debt trends, advisors should remain vigilant in reassessing risk exposure and identifying opportunities in a shifting financial landscape.
