Ballooning global debt up by record US$57t since 2008 crisis

Singapore

GLOBAL debt has grown by a record high of US$57 trillion since the 2008 financial crisis, posing fresh risks to financial stability.

A recent report by McKinsey Global Institute (MGI) examines the evolution of debt and prospects for deleveraging in 22 advanced economies and 25 developing economies.

"High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions," the report by the business and economics research arm of multinational management consulting firm McKinsey & Company cautions, referring to the rate of increase in global debt that has now out-paced world GDP growth.

As deleveraging would require dramatic reductions in fiscal deficits or increases in real GDP growth, countries may need to consider new approaches to reducing government debt, such as greater government productivity, more extensive asset sales, taxes, and more efficient debt restructuring programmes.

According to the report, no major economies have reduced the ratio of debt to GDP in the 'real economy', which consists of households, non-financial corporations, and governments, excluding financial-sector debt, a surprising trend given the magnitude of the 2008 crisis. In contrast, 14 countries have increased their total debt-to-GDP ratios by more than 50 percentage points.

It is noteworthy that some of the growth in global debt is benign and even desirable. Developing economies have accounted for 47 per cent of all the growth in global debt since 2007, which to some extent reflects healthy financial system deepening. Moreover, debt in developing countries remains relatively modest, averaging 121 per cent of GDP, compared with 280 per cent for advanced economies, said MGI.

There are exceptions to this trend, though. A particularly worrying cause for concern would be China, whose debt at 282 per cent of GDP has surpassed those of advanced economies like the United States and Germany, the report said. The debt of the world's second largest economy has nearly quadrupled since 2007, rising from US$7.4 trillion in 2007 to US$28.2 trillion by mid-2014. The MGI report estimates that nearly half of China's debt is directly or indirectly related to real estate, collectively worth as much as US$9 trillion.

Debt in Singapore may be, at first glance, worrying. Singapore has the highest ratio of non-financial corporate debt in the world at 201 per cent of GDP in 2014. However, this phenomenon can be attributed to its position as a major business hub. As the debt incurred by Singapore is often used to fund the activities of global corporations in other countries, its relationship to Singapore's GDP is not indicative of risk, MGI said.