OECD governments need to start refinancing their debts

15 Feb 19

Governments need to focus on their debts with OECD research showing sovereign borrowing is to hit a record high in 2019, says the OECD's Fatos Koc. 


Compared to the pre-crisis level, outstanding central government debt for the OECD area as a whole doubled in nominal terms, and exceeded USD 45 trillion in 2018

During the past decade, sovereign debt structure in the OECD area has been significantly affected by the fiscal and monetary policy responses to the financial crisis.

Between 2007 and 2018, the borrowing needs of OECD governments surged drastically and outstanding central government debt for the OECD area as a whole doubled in nominal terms. At the same time, favourable funding conditions eased the debt sustainability concerns and enabled public debt managers to enhance resilience of public finance to shocks.

Specifically, the 2019 edition of the OECD Sovereign Borrowing Outlook[i] indicates that the outstanding government marketable debt in nominal terms increased from USD 22.5 trillion in 2007 to USD 45.2 trillion in 2018.

Going forward, gross borrowings of OECD governments from the markets, which peaked at USD 10.9 trillion in 2010 in the wake of the crisis, are set to reach a new record level in 2019 by exceeding USD 11 trillion. As a result, outstanding central government marketable debt for the OECD area as a whole is projected to rise further to USD 47.3 trillion in 2019.

While government debt in nominal terms has continued to build up further, growth of debt-to-GDP ratios slowed down thanks to favourable differential between cost of debt and growth rates. The central government marketable debt-to-GDP ratio in the OECD area jumped by 23 percentage points from 49.5% in 2007 to 72.6% in 2017.

The Outlook shows that that while the new debt issuance is set to increase the nominal level of outstanding central government debt further, the relevant debt-to-GDP ratio is projected to remain at 72.6% in 2018-19, mainly owing to economic growth in the OECD area.

Indeed, compared with the pre-crisis levels, the interest rate-growth differentials – the difference between the interest rate paid to service government debt and the growth rate of the economy – in the major OECD countries have improved significantly and slowed growth in debt-to-GDP ratios in recent years.

The impact of interest rate changes on cost of sovereign debt depends on the maturity and interest rate composition of sovereign debt as well as the extent of borrowing needs.

Global financial conditions are loose overall, but have tightened considerably during the past year. This edition of the Outlook illustrates that the impact of higher interest rates on the cost of debt to be relatively low in countries where new borrowing needs are limited and the share of fixed-rate debt with long maturity is high.

In terms of maturity and interest rate structure, the composition of sovereign financing in the OECD area has remained tilted towards long-term fixed-rate securities over the past decade. For instance, the weighted average-term-to-maturity of outstanding marketable debt increased from 6.2 years in 2007 to almost 8 years in 2018, which implies a slower pass-through of changes in market interest rates to government interest costs.

Clearly, sovereign issuers have benefited from favourable funding conditions to strengthen the resilience of debt portfolios to potential future shocks.

Nevertheless, OECD governments will need to refinance around 40% of their outstanding marketable debt in the next three years. Hence, high debt service ratios might pose significant challenges in terms of re-financing risks for sovereign debt management.

[i] The OECD Sovereign Borrowing Outlook is an annual publication that presents central government gross and borrowing requirements, outstanding marketable debt figures, and discusses funding strategies and debt management policies for the OECD area, www.oecd.org/finance/oecdsovereignborrowingoutlook.htm.


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