Covid-19 Pandemic Likely to Add to an Already High World Government Debt
Sat, April 10, 2021

Covid-19 Pandemic Likely to Add to an Already High World Government Debt

 

Japan is one of the major world economies where public debt exceeded GDP even before the pandemic. / Photo by Princess_Anmitsu via Shutterstock

 

The Covid-19 pandemic is likely to add to an already high government debt around the world, nonpartisan Pew Research Center finds.

 

Pandemic relief measures and government debt

Before the global health crisis arrived, there were countries with considerable debt in their ledgers and the economic consequences of Covid-19 will lead to an increase in these government debts. Even though governments of Europe, the United States, and elsewhere are spending trillions of dollars as part of their health emergency measures to contain the impact of the virus, the global economy is still forecast to decline by 3% this year. This economic downturn will also likely cause the decline of tax revenues.

Government debt is often measured as a percentage of the country’s gross domestic product to make sure that the debt is measured in comparison to the country’s ability to pay, its future debts, and its creditworthiness.

The Pew Research Center cited Japan, with a debt load higher than other countries in the world. Debt load refers to the total amount of debt. In 2017, Japan’s gross debt accounted for 235% of its GDP. This is the most recent final data that the International Monetary Fund (IMF) has. In fall last year, the Japanese government increased the country’s tax to 10% from 8%, a step meant to help the government tackle its public debt load.

 

Major world economics where public debt exceeded GDP

Investment management company Invesco Asset Management Ltd.’s global market strategist told Bloomberg that the tax hike would be a major part of Prime Minister Abe’s legacy. The Prime Minister made that “very important step” because of the dire financial condition that Japan is in. Abe also considered the possibility of reversing the tax hike if the economic effects on the country are harmful.

Japan is one of the major world economies where public debt exceeded GDP even before the pandemic. Another major economy in an almost similar situation is Italy. In 2018, Italy’s debt reached 132% of GDP, followed by USA with a public debt that accounted for 104% of its GDP, France 98%, Canada 90%, and the United Kingdom 87%. Together with Japan, all of these countries are a part of the firm called Group Seven, which comprise the leading industrial economies in the world. Another country that is a part of the G7 forum is Germany with debt that accounted for 62% of its GDP in 2018.

 

 

Spain, Brazil, and Argentina are other large economies with debt that accounted for 97%, 88%, and 86% of GDP. The government debt of China, the second-largest economy in the world after the US, accounted for 51% of GDP in the same year. On April 17, it reported that its GDP in the first quarter of 2020 fell for the first time in decades as coronavirus forced businesses and factories to close in the country. China contracted 6.8% in the first three months of the year since it began recording its quarterly figures in 1992.

Global business intelligence platform Economist Intelligence Unit’s Yue Su said in an interview with BBC that China’s GDP contraction from January to March will “translate into permanent income losses.” In the first quarter of 2019, China’s economy grew 6.4% even when it was in a trade war with the US.

The decline in oil prices also affected the debt level of countries that rely heavily on oil. The gross government debt as a share of GDP of Saudi Arabia, for instance, rose to nearly 11% points between 2014 and 2016.

 

Debt-to-GDP ratios

Before the coronavirus outbreak, public debt in most countries was already high. The debt-to-GDP ratios of almost 90% of the countries considered by IMF as advanced economies were higher in the past few years than during the global recession from late 2007 to mid-2009.

The debt-to-GDP ratio is the ratio of a country’s public debt to its GDP. The higher the debt-to-GDP ratio, the less likely the country will pay its debt, and the higher its risk of default.

As of December 2018, Japan’s government debt to GDP was 238%. Countries with the highest government debt to GDP after Japan were Greece (177%), Lebanon (151%), Italy (135%), Singapore (126%), Cape Verde (124%), and Portugal (118%). This is according to economic indicator platform Trading Economics.

The Pew Research Center also mentioned how government debt has increased in low-income developing nations. These countries have per-capita income that is below the IMF’s threshold.

 

 

Meanwhile, the United Nations Trade and Development body sets out urgent measures needed to forestall a “looming” debt disaster in developing countries reeling from the economic shock of the pandemic. UNCTAD Secretary-General Mukhisa Kituyi said there is an urgent need for the international community to take more steps to relive the financial pressure that debt payments are exerting on these countries. UNCTAD also called for a $2.5 trillion Covid-19 crisis package for developing nations.

 

Determining the country’s risk level

There are some experts, however, who believe that debt-to-GDP ratios alone are not enough to determine the risk level of a country. For instance, the US and Japan may have the highest government debt-to-GDP ratios but credit rating agencies have given both of these countries a high mark. Based on the sovereign rating list, which is an evaluation made by a credit rating agency and evaluates the creditworthiness of the issuer government of debt, Japan has an overall upper-medium grade in its credit ratings with Moody’s (A1), S&P (A+), and Fitch (A). Assessments with these agencies reflect Japan’s high likelihood of paying its debt obligations.

A $2 trillion worth of relief plan was also recently enacted by the United States and it is expected to drive up the country’s debt sharply. However, the Pew Research Center survey shows that the majority (88%) of Americans believe that economic aid was the “right thing to do.” They believe that the aid plan will provide a fair amount or a great deal of help to the local governments and state (67%), unemployment people (68%), small businesses (71%), and large businesses (77%).

 

Assessments with these agencies reflect Japan’s high likelihood of paying its debt obligations. / Photo by Natee Meepian via Shutterstock

 

High public debt, in the long run, makes economic expansion more expensive. While a small fraction of the population may consider government debt as the most important problem that the country is facing today, there is a need to consider sovereign debt restructuring, which focuses on two elements: debt relief and debt rescheduling.