Record rise in government debt will hit emerging markets harder: Fitch

A record increase in government debt globally will hit emerging markets disproportionately, with developing nations not benefiting from lower interest rates and debt service burdens providing a cause for concern, Fitch Ratings said on Wednesday.

Global sovereign debt soared by $10 trillion to $77.8 trillion, or 94% of world gross domestic product, as governments boosted spending on health and shored up their economies roiled by the fallout from the coronavirus pandemic, Fitch calculated.

Both the increase and debt levels are at a record high, Fitch’s head of sovereign ratings, James McCormack, wrote in a report, adding that the last $10 trillion tranche took seven years to build.

And while the government debt-to-GDP measure – often used as a rough measure for debt sustainability – stood at around 60% of GDP for both developing and developed markets, this masked a divergence in interest rates for the two groups, McCormack said.

“For emerging-market sovereigns there has been no ‘free lunch’ associated with lower rates,” he wrote.

The average interest rate on the entire stock of a government’s debt has fallen to 2% from 4% over the past decade in developed markets, the report found. Across emerging markets, the rate increased from 4.3% to 5.1%.

Fitch forecasts that interest payments by governments in developed and emerging markets will converge by 2022 at about $860 billion, even though the former group’s debt is three times the size of the latter.

“The upshot is that while developed- and emerging-market governments now have similar debt/GDP ratios, they have very different interest-service burdens,” McCormack said.

“With rapidly rising emerging-market government debt, this should be a cause for concern, and has been a contributing factor to the debt distress in several emerging markets in 2020.”

Government interest payments had doubled relative to both GDP and revenue since 2012, while figures for sub-Saharan Africa sovereigns were “startling” — the ratio of interest payments as a share of revenue soared to 12% from 5% over the same period.

Last year saw a record five sovereign defaults – Argentina, Ecuador, Lebanon, Suriname and Zambia.

“We expect there to be more defaults in 2021, along with greater attention on debt-remedy initiatives,” said McCormack.