- Global bond markets will face a “mini boom-bust cycle,” the Institute of International Finance said.
- The mounting deficit will be made more extreme by next year’s election cycle.
- If populist policies win, there will be less emphasis on fiscal restraint.
Rising deficits and unbridled growth in global debt could spark new volatility in fixed-income markets, the Institute of International Finance predicted in a Thursday note.
Between 2024 and 2027, government overspending is expected to add $5.3 trillion a year to international debt, at a time when high long-term interest rates are already weighing on investor sentiment.
The institute said this could trigger a ‘mini boom-bust cycle’ to become a bigger theme in fixed income. This is the type of volatility that US Treasuries faced recently, as concerns over increased government borrowing helped fuel massive bond selling last month.
High deficits are not limited to the US, and many government budgets such as Egypt, India, Malaysia, Pakistan, South Africa and Turkey are being constrained by high shares of interest expenditure.
But this trend could also accelerate as more than 50 countries head into election season in 2024, the note said. At present, the ruling parties may have to face difficulties amidst the increasing debt crisis of the private sector and worsening geopolitical situations.
It added, “If populist policies aimed at controlling social tensions are adopted in the upcoming elections, the result could still be more government borrowing and less fiscal restraint.” The interest burden for many sovereign debtors – from already high levels.”
In 2023, global government debt is projected to rise to $88.1 trillion, up 8% from a year earlier.
Meanwhile, although the global debt-to-GDP ratio – a measure of whether international growth has kept up with rising debt – remained relatively stable at 333%, it varied by geography.
The debt ratio in emerging markets reached an all-time high of 255%. The institute said the surge was more pronounced in countries such as Russia, China and Saudi Arabia.
“Looking ahead, we expect global debt ratios to move upward again as global growth momentum remains weak and inflation pressures ease,” it said.