Sovereign Debt

Sovereign debt (also called government debt, national debt, public debt, or country debt) refers to the financial liability of a government to itself (i.e., its central bank), other domestic creditors, and foreign creditors. Governments borrow either by issuing securities backed by the government or by directly borrowing loans from international institutions, such as the International Monetary Fund (IMF). Sovereign debt can either be short-term or long-term. T-bills are short-termed (i.e., less than one year), T-notes are medium termed (i.e., 2,3,5, 7, and 10 years), and T-bonds are long termed (i.e., 20- 30 years). Countries' national debt is evaluated by the portion of the debt of their Gross Domestic Product (GDP).

Government debt is exacerbated globally at times of crisis Induced by the pandemics, and the rollover ratio, which means renewing loans, has increased for the G7 countries by 6% of the total debt from 2019 to 2021. With the rising global geopolitical tensions in addition to the pandemic adverse effects, S&P estimated sovereign debt to be 1/3 higher than the average recorded before the pandemic. Furthermore, fiscal consolidation, referring to the fiscal policies to reduce government debt, will be more challenging with the rising interest rate which is expected to be around a 14.5% hike in the debt servicing cost.

However, even though interest rates are rising, S&P Global Rating still projects a moderate increase in governments’ interest bills in most G-7 nations. S&P has estimated that 137 nations will increase their borrowings by about USD 10.4 trillion with a total of USD 66.5 Trillion which is 30% lower than at the time of the pandemic but remains 1/3 above the 2016-2019 period, as shown below in figure 1. It is expected to further reach an unprecedented level of about USD 71.6 trillion in 2022. Also, British Asset Manager Janus Henderson estimated a 9.5% increase in global sovereign debt in 2022. Figure 2 shows the countries with the highest shares of commercial debt stock in 2022 with the US, China, Japan, the UK, and Italy as the largest sovereign issuers.


Figure 1| Source: Total Sovereign Borrowings (2016-2022F)

Figure 2| Source: S&P Global Ratings


Moreover, figure 3 below shows the decreasing total returns of global sovereign bonds using the S&P Global Sovereign Inflation-Linked Bond Index which measures the market-value-weighted performance of inflation-linked sovereign debt publicly issued by governments in their domestic markets.  

Figure 3| Source: S&P Global Ratings


Countries too have credit ratings indicating the economy’s soundness and ability to repay its debt. The lower the rating, the higher the risk of default; thus, paying higher interest rates. During January 2020-September 2021, S&P Global downgraded about 25% of rated sovereigns at least once. The graph below shows the increase in lower ratings for nations worldwide.

 Figure 4| Source: S&P Global Ratings


Tighter borrowing conditions and increased global military hostilities set global economies under pressure meaning that governments might tend to increase tax revenues pressuring the consumers even more along with the already existing persistent inflation globally.


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