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