Global long-term growth at risk due to high worldwide debt

The problem of global debt is multifaceted and has significant economic, social, and political implications.
Many countries, especially developing ones, have borrowed heavily in recent years to finance infrastructure, healthcare, and other essential services.
High sovereign debt levels often make it difficult for governments to meet their financial obligations and lead to defaults or restructuring.
Corporations and households in many countries have also borrowed more, contributing to overall financial fragility. Excessive private debt invariably leads to reduced consumer spending, slower growth, and increased bankruptcy risks.
A new report has warned global long-term growth is at risk due to high worldwide debt and political instability.
The real worry, according to World Economic Forum managing director Saadia Zahidi, lies with developing countries.
These nations face mounting debt that could spread problems to other emerging economies.
She highlights a startling fact: “There’s about 3.3bn people that live in economies where the debt servicing levels are actually higher than what those economies are spending on...health and education.”
This situation creates a difficult balancing act for these countries. “Now that’s particularly a developing economy problem,” Zahidi explains, noting it means that there are a lot of “trade-offs” between social spending and servicing debt. “So overall there is a fiscal squeeze,” she states.
Recently, the Institute of International Finance warned that the world is mired in $315tn of debt.
This global debt wave has been the biggest, fastest and most wide-ranging rise in debt since World War II, coinciding with the Covid-19 pandemic.
“This increase marks the second consecutive quarterly rise and was primarily driven by emerging markets, where debt surged to an unprecedented high of over $105tn — $55tn more than a decade ago,” the IIF said in a report.
Around two-thirds of the $315tn owed originates from mature economies, with Japan and the United States contributing the most to that debt pile.
However, the debt-to-GDP ratio for mature economies, which is seen as a good indicator of a country’s ability to service its debts — has been falling in general.
On the other hand, emerging markets held $105tn in debt, but their debt-to-GDP ratio hit a new high of 257%, pushing the overall ratio up for the first time in three years.
China, India and Mexico were the biggest contributors, the report noted.
The IIF identified stubborn inflation, rising trade friction and geopolitical tensions as factors that could pose a significant risk to debt dynamics, “putting upward pressure on global funding costs.”
“While the health of household balance sheets should provide a cushion against ‘higher for longer rates’ in the near term, government budget deficits are still higher than pre-pandemic levels,” the IIF added.
Of the $315tn debt stock, household debt, which includes mortgages, credit cards and student debt, among others, amounted to $59.1tn.
Business debt, which corporations use to finance their operations and growth, stood at $164.5tn, with the financial sector alone making up $70.4tn of that amount. Public debt made up the rest at $91.4tn.
The global debt problem threatens economic stability, hinders growth, and increases the risk of financial crises.
Addressing this issue, obviously requires better fiscal management, debt restructuring, and policies that promote sustainable economic development.