Rise in sovereign debt to end in 2023: S&P

Reflecting increased public spending to deal with the Covid-19 crisis, S&P Global Ratings has projected that median general government debt for all rated 135 sovereigns will rise by end-2021 to a record 62.6 per cent of GDP.

Reflecting increased public spending to deal with the Covid-19 crisis, S&P Global Ratings has projected that median general government debt for all rated 135 sovereigns will rise by the end-2021 to a record 62.6 percent of GDP. That compares with 49 percent at end-2019 and 32.5 percent at end-2008.

For the Group of Seven nations -- Canada, the United States, France, Germany, Italy, Japan and the United Kingdom -- S&P projects average government debt at end-2021 will increase to 128.7 percent of GDP versus 106.3 percent in 2019 and 101.3 percent in 2008. The trend for emerging markets is similar. For end-2021, S&P forecast median general government debt for the largest 60 emerging-market sovereigns at 65.8 percent of GDP, or 15.5 percentage points above 2019 levels and 30 percentage points above end-2008 figures.

At the end of this year, general government debt is set to exceed 100 percent of GDP in 13 emerging markets, more than double the 2019 number. "As economies rebound and the crisis abates, we forecast that by 2023 two-thirds of rated sovereigns will manage to at least stabilize government debt to GDP," said S&P Global rating credit analyst Frank Gill in the report titled 'Sizing Sovereign Debt and the Great Fiscal Unwind."

"That still leaves roughly one-third of rated governments unlikely to stabilise public finances by 2023," added Gill. In their efforts to consolidate public finances commencing in 2022, governments will likely do a lot of soul searching about whom and how they tax.

"We expect that, sooner or later, governments will try to tax the exuberance increasingly priced into financial and non-financial assets via higher capital gains tax rates among other options," said Gill. Once herd immunity has been established, financial market pressures on governments to deliver fiscal and structural reforms may intensify as policy rates gradually start to normalise.

In developed Europe, now that the UK has left the EU, euro area governments may take steps to fully integrate the single market for services and possibly even consider introducing a pan-European labour code, though political resistance at the national level will be fierce. "The alternative, the status quo on fiscal and structural economic policies, is likely to yield disappointing growth outcomes, putting further pressure on sovereign creditworthiness," said Gill.