high and rising debt levels: should we worry?...ghost of recessions past –high u.s. corporate debt...
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High and Rising Debt Levels:
Should we worry?
Global Debt Monitor Slide Deck
Emre Tiftik, Deputy Director, Global Policy Initiatives
Khadija Mahmood, Associate Economist, Global Policy Initiatives
August 2019
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 2
IIF Quarterly Global Debt Monitor
• Launched in November 2015 in response to growing demand from our members, both private and public sector
• In-depth analysis of debt dynamics by sector, country, currency
➢ Over 70 countries/regions—including mature, emerging, frontier markets
➢ Timely updates: Q1 1995 – Q1 2019, published quarterly
➢ Offers coverage of all four major sectors—household, non-financial corporate, financial and public sector
➢ Quarterly estimates of currency breakdown of EM debt by sector and country (USD, EUR, other foreign currencies, and local currency)
➢ Detailed data on issuance and maturity profile of EM bonds and syndicated loans
➢ Credit watch: assessment of trends in sovereign/corporate ratings
➢ Others: foreign/domestic ownership of EM local currency government debt; sectoral credit-to-GDP gap series; redemption profile of U.S. HY/IG corporate bonds
Sources: BIS, IMF, Bloomberg, Haver, Thomson One, National Sources, IIF Global Debt Monitor, IIF Weekly Insight
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 3
300
305
310
315
320
325
200
205
210
215
220
225
230
235
240
245
250
2012 2013 2014 2015 2016 2017 2018 2019
$ trillion % of GDP, weighted avg.
Global debt (in USD)
% of GDP (rhs)
Big jump in global debt as financial conditions ease
Déjà vu – lower rates, higher debt
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 4
Non-financial corporate and government sectors have seen the biggest rise in debt levels since 2007 (in nominal terms)
15
2119 19
32
38
32
48
41
65
6057
47
73
67
60
0
10
20
30
40
50
60
70
80
Households Non-fin corporates Government Financial Corporates
1997
2007
2017
2019
$trillion, Q1 of each year
Global Sectoral Indebtedness
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 5
0
10
20
30
40
50
60
70
80
90
100
Households
Non-fin corporates
General government
Financial sector
percent of GDP
Emerging Market Debt by Sector
40
50
60
70
80
90
100
110
120
130
140
Households
Non-fin. corporates
General government
Financial sector
percent of GDP
Mature Market Debt by Sector
Slower growth may contribute to a renewed rise in debt ratios
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 6
Elephants in the room: U.S. and China…
0
20
40
60
80
100
120
140
160
180
200
220
240
260
2002 2006 2010 2014 2019
USD trillion, Q1 of each year
Total Global Debt (all sectors)
Mature market ex-U.S.
U.S.
China
Emerging market ex-China
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 7
…but Japan, Italy and France also bear watching
GH
KEUA
NG
LB
HU
PK
CZ
EG
PHCO
NZ
AR
ZA
CL
AE
SA
IL
MY
GR
FI
ID
TH
PT
PL
MX
TR
DK
SG
AT
IE
NO
RU
HK
SE
BE
CHNL
BR
IN
AU
ES
KR
CA
ITDE
UK
FR
JP
CN
U.S.
0
80
160
240
320
0 80 160 240
Non-financial private sector debt, % of GDP, as of Q1 2019
General government debt, % of GDP
Global Debt Bubbles (ex-Financials)
Bubble size indicates USD amount of total debt (ex-financials), Q1 2018
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 8
-20 -15 -10 -5 0 5 10 15
NetherlandsIreland
PortugalSwedenNorway
SpainUK
ItalyAustria
EADenmark
U.S.MM
AustraliaSwitzerland
GermanyFrance
New ZealandJapan
CanadaFinland
percentage points, difference between 2018Q1 and 2019Q1
Households
Non-fin corp.
Financial sector
Government
II
II
Chg. in FIN total debt= 27 pp
Chg. in NLDtotal debt= 35 pp
Change in mature market debt-to-GDP
II
Many mature economies have seen debt ratios fall over the past year (notably in EU), but others still taking on more debt
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 9
EM debt to GDP ratios on the rise in many Latin American countries; same for Korea, South Africa and Pakistan
-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20
UkraineEgypt
UAEHungaryLebanon
PolandKenyaRussiaIsraelCzech
GhanaS. Arabia
IndonesiaIndia
MexicoTurkey
PhilippinesMalaysia
NigeriaThailand
EM30Colombia
ChinaPakistanS. Africa
BrazilKoreaChile
Argentina
percentage points, difference between 2018Q1 and 2019Q1
II
Household
Non-fin corporates
Financial sector
Government
Chg. in FIN total debt= 34 pp
Change in emerging market debt-to-GDP
II
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 10
Higher debt levels have led to significantly higher debt service costs for many emerging markets
EG
GH
UA
BR
LB
EM
INPK
All
MM
IT
EA BE
DE
GRZA
0
3
6
9
12
0 3 6 9 12
net interest expense
% of GDP, 2019/20 avg.
% of GDP, 2009/10 avg.
Net interest expense on general government debt
Source: IMF, IIF staff estimates
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 11
As debt levels grow, a rising number of “zombie firms” in many countries can’t cover interest expense from current earnings
0
10
20
30
40
50
60
70
Bra
zil
Ca
na
da
U.S
.
Ch
ina
Tu
rkey
Ind
ia
Ind
on
esi
a
Mex
ico
Ita
ly
UK
Fra
nce
Ru
ssia
Ger
ma
ny
Ja
pa
n
percent of firms with ICR less than 2 (% of assets)
201020172018
Number of Stressed Firms
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 12
High cash holdings provide a cushion for the corporate sector in some countries—notably China, Japan
0
20
40
60
80
100
120
140
160
180
0
1
2
3
4
5
6
7C
an
ad
a
Ind
ia
Mex
ico
Ger
ma
ny
UK
Ita
ly
Bra
zil
U.S
.
Ru
ssia
Ind
on
esi
a
Fra
nce
Tu
rkey
Ch
ina
Ja
pa
n
Debt-to-cash* Debt-to-GDP** (rhs)
ratio, debt-to-cash percent
Non-Financial Corporate Debt-to-Cash levels
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 13
For many countries, including the U.S., a significant percentage of small firms are facing debt-related stress
0
10
20
30
40
50
60
Small cap Mid cap Large cap
percent of "risky" firms (% of each cap's total assets), ICR = Interest-Coverage-Ratio
ICR<1
1<=ICR<2
United States – Distribution of Stressed Firms
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 14
U.S. small- and medium-sized firms have much higher debt-to-cash ratios than do large-cap firms
2.5
3.0
3.5
4.0
4.5
5.0
0
1
2
3
4
5
6
small-cap medium-cap large-cap
$ trillion, H1 2018, U.S.
Debt
Cash
Debt/cash ratio (rhs)
Unites States: Non-financial Corporate Debt to Cash Ratios, by market cap
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 15
Many Americans are living paycheck to paycheck
-10
0
10
20
30
40
50
1950 1965 1980 1995 2010
Top 1%
Middle 40%
Bottom 50%
percent of total personal wealth, by wealth quantile
The bottom 50% of Americans have negative net personal wealth
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 16
U.S. corporate debt hit a record high in Q1 2019
40
90
140
190
240
290
340
390
1998 2002 2006 2010 2014 2018
percent of GDP
Household
Non-fin corporates Government
Financial sector
U.S. debt-to-GDP
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 17
Ghost of recessions past – high U.S. corporate debt levels
0
10
20
30
40
50
60
-1.8
-1.2
-0.6
0.0
0.6
1.2
1.8
1985 2002 2019
Probability of a recession within next 12 months (rhs)**
U.S. Business Health Index*
index, shaded area show recessionary periods percent
U.S. business health on the decline, probability of U.S. recession on the rise
Source: IIF, Fed; * a weighted average of the first four factor loadings from the twelve variables which summarize U.S. firms’ financial strengths and vulnerabilities; **Fed’s model uses the difference btw 10-year and 3-month Treasury rate to calculate the probability of recession twelve months ahead
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 18
Sharp rise in U.S. leveraged loans and student debt—reminiscent of subprime loans before the financial crisis
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
US subprime mortgages (2006) U.S. leveraged loans (2018)* U.S. student loans (2018)
8.3% of U.S. household debt
$ trillion
6.6% of U.S. non-fin. corporate debt
10.1% of U.S. household debt**
*Excludes leveraged loans for financial corporates**Over 90% of these are guaranteed by U.S. Department of Education
Buildup in leveraged loans and student loans—on a par with subprime loans
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 19
Persistent rise in U.S. federal debt since 2009
-1.5
-0.2
0.0
1.8
5.0
10.4
-4 -2 0 2 4 6 8 10 12
Financial sector
HH mortgage debt
State & local government
HH non-mortgage debt
Non-fin. corporates
Federal government
$ trillion, change since Q1 2009
Change in U.S. debt by sector
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 20
…though covenant-lite issuance saw a big drop in early 2019
0
200
400
600
800
1000
1200
2011 2012 2013 2014 2015 2016 2017 2018 2019
$ billion, 6-month moving sum, issuance
High yield corporate bonds
Other leveraged loans
Covenant-lite
Much slower growth in the leveraged loan market in H1 2019
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 21
USD-denominated debt is on the rise
0
5
10
15
20
25
30
1998 2003 2008 2013 2018
Mature markets (ex-U.S.)
Emerging markets (ex-China)
percent of GDP, USD-denominated debt of non-bank borrowers
Dollarization is a global phenomenon
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 22
The usual suspects: Argentina and Turkey
0
1
2
3
4
5
6
7
8
9
2006 2008 2010 2012 2014 2016 2018
$ trillion
USD
EURO
Other
FX-Denominated Total Debt
AR
BR
CL
CN
COCZ
IN
ID
ILKR
MY
MX
PO
RUSA
ZA
TH
TR
0
20
40
60
80
100
0 20 40 60 80 100
% of GDP, as of Q1 2019
% of GDP, as of Q4 2009
Increasingreliance on FX debt
FX-denominated debt-to-GDP
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 23
Mexico, South Africa have a high proportion of USD corporate bonds on negative outlook; stronger USD would hurt
0
10
20
30
40
50
60
70
MX AR ZA KR IN EM CL BR PE ID CN RU
Negative outlook
Positive outlook
% of total USD-denominated non-financial corporate bonds
A dollar rally would be particularly challenging for the EM USD corporate bond market
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 24
Deterioration in EM corporate credit outlook in recent quarters
-140
-120
-100
-80
-60
-40
-20
0
20
40
2012 2013 2014 2015 2016 2017 2018 2019
number, avg. chg in S&P, Fitch & Moody's ratings for EM firms*
Downgrades
Downgrade watches
Upgrades
Upgrade watches
Net
EM corporate ratings - more downgrades than upgrades
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 25
China’s total debt now surpasses 300% of GDP…
0
40
80
120
160
200
240
280
320
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
percent of GDP, Q2 of each year
Household
Non-fin corporates
Government
Financial sector
China: Total Debt-to-GDP
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 26
…largely driven by the debt of non-financial firms (mostly state-owned enterprises)
15.4
6.35.4
4.4
-2
2
6
10
14
18
Non-fin corporates Household General government Financial sector
$ trillion, change since Q1 2009Change in Chinese debt by sector
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 27
Reliance on short-term debt is high across emerging markets
0
10
20
30
40
50
60
70
80C
hin
a
Ko
rea
Eg
yp
t
Pa
kis
tan
Vie
tna
m
Tu
rkey
Ind
ia
Den
ma
rk
Ind
on
esi
a
Ma
lay
sia
Po
lan
d
Ja
pa
n
Ph
ilip
ines
s
Fra
nce
Th
ail
an
d
Sw
eden UK
Ru
ssia
Sp
ain
Co
lom
bia
S.A
rab
ia
Au
stri
a
Ger
ma
ny
Mex
ico
Sw
itze
rla
nd
Arg
enti
na
Ita
ly
Ch
ile
S.A
fric
a
Be
lgiu
m
U.S
.
No
rwa
y
Au
stra
lia
Bra
zil
Ca
na
da
percent, short-term debt as a share of total debt, excl. financials
"Blue=mature markets"
Emerging market firms face high short-term refinancing needs
I N S T I T U T E O F I N T E R N A T I O N A L F I N A N C E 28
EM refinancing needs will remain high in 2020-21
0
500
1000
1500
2000
2500
14 15 16 17 18 19 20 21 22 23
USD billion
2019: $1.1 trillion remainingBonds
Syndicated loans
EM Debt Maturity Profile
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