By Leon De Wet

Will the next generation be saddled with a massive global debt to pay back? Or will Governments be able to take advantage of low interest rates and plan a way out of the red in the years ahead?

One piece of encouraging news is that as more expensive debt matures, and is refinanced at cheaper rates, the world’s interest bill is not forecast to increase. Borrowings in 1995 were at 7.6%. Today they’re around 2%. That’s a significant saving.

Another positive is the growth in the world economy. Growing economies can help to underpin the greater debt load with a larger tax base. However, sovereign debt grew more rapidly than the global economy. The debt-to-GDP has risen from 59% to almost 85% between 1995 and 2020.

The recently published Janus Henderson Sovereign Debt Index report shows just how much government debt has soared as extraordinary measures were undertaken to boost economies in the aftermath of the GFC and current Covid-19 pandemic.

The report highlighted:

  • Global government debt rose from $16.7 trillion to $62.5 trillion between 1995 and 2020, or from $4,371 to $13,050 for every person.
  • In 2020 alone debt rose $9.3 trillion. The U.S. accounted for almost one third of that borrowing, however the biggest borrower relative to GDP was the U.K.
  • Despite debts in 2020 being almost 4 times higher than 1995, with interest rates declining over the period, the world’s interest bill only rose by a little over a fifth.

What does this mean for you? If governments can reduce debt after the pandemic has passed, and grow the economy, they will be better positioned to deal with a future health or economic crisis. Will there be some fiscal belt tightening down the road? Possibly, but it’s hard to say when. The important thing is to keep a watchful eye on any legislation changes that might have the potential to push your investment strategy off course.

If you would like more information please call 1300 ELSTON or contact us to speak to one of our advisers.

Source: Janus Henderson Sovereign Debt Index – Edition 1