Sovereign Debt 2023: Borrowing Will Stay Elevated Despite Rising Cost Of Debt (2024)

This report does not constitute a rating action.

Despite easing global inflation and China's exit from its zero-COVID policy, the world's macroeconomic outlook in 2023 remains challenging. S&P Global Ratings expects global growth to slow down significantly. As core inflation in advanced economies remains high, central banks will need to continue to raise rates and keep them high until 2024.

Even if inflation appears to have peaked or will do so soon in emerging markets (EM), it will remain above target, keeping monetary policy rates high. Coupled with elevated commodity prices and geopolitical uncertainty, including about the evolution of the Russia-Ukraine war, these macroeconomic conditions create a difficult backdrop for governments' fiscal policies. If anything, sovereigns face another challenging fiscal year, further complicated by a more polarized social and political environment. In this context, and despite tighter financing conditions, we expect sovereign borrowings in 2023 will stay well above pre-pandemic levels, a dynamic that will add negative pressures on sovereign credit quality.

We project that the 137 sovereigns we rate will borrow an equivalent of $10.5 trillion from long-term commercial sources in 2023. This is broadly similar to the amount rated central governments borrowed last year. That said, and even if long-term sovereign borrowings are below their 2020-2021 pandemic-driven peaks, gross issuance will remain more than 40% above those in 2016-2019 on average (see table 1).

Table 1

Persistent expenditure pressure due to elevated energy prices is one of the key causes of high borrowing, especially in Europe. The double shock of the COVID-19 pandemic and high commodity prices (including for food and energy), initially triggered by the post-pandemic recovery and later amplified by the Russia-Ukraine war, have prompted governments around the world to roll out and maintain fiscal measures to soften the blow to households and businesses. The shocks have also made domestic political landscapes more fragmented, rendering fiscal consolidation more challenging than in the past and prompting new rounds of upward adjustments of social transfers, including pensions and public wages. Notably, as all numbers presented in this report are converted into U.S. dollars, exchange rate movements also influence borrowing trends.

We estimate the combined cost of the pandemic and the energy crisis at $10 trillion over 2020-2023. The cost includes the effect of COVID-19 on public finances stemming from revenue contraction and higher spending in 2020 and 2021 at about $8.4 trillion, which we quantify by the difference between governments' pre-pandemic net borrowing plans (including short-term debt) and their actual net borrowings. Even if the effects of the two shocks are difficult to disentangle, we estimate the approximate cost of fiscal measures related to elevated commodity prices, especially for energy, will have reached about $1.65 trillion in 2022-2023 (see chart 1). This estimate is derived through a comparison of borrowings in 2022-2023 with the average historical level of sovereign borrowings between 2016 and 2019. As a result, the combined fiscal effect in 2020-2023 will amount to 10% of all rated sovereigns' GDP.

Elevated gross borrowing also stems from substantial debt-refinancing needs on the back of shorter average debt maturity. The pandemic-induced uncertainty led many sovereigns to accelerate short-term borrowings. The trend was especially visible, for example, in the U.S., Japan, and Germany, where the share of short-term borrowings increased to over one-third of the total borrowings during the pandemic. Governments have reduced short-term issuance since then, but the average share of short-term debt in the global stock of sovereign debt of 12.0% in 2022 was still 2.5 percentage points higher than its 2019 level (9.5%). In tandem with broadly stagnant average long-term debt maturity over the past two years (of about 8.5 years), the rollover ratios for many sovereigns remain high (see table 4). The trend will likely be more pronounced in lower-rated EM sovereigns, where we observe a shift to a shorter average maturity of domestic borrowing as the sizable increase in debt issuance since the onset of the pandemic has reduced the domestic market's capacity to absorb new longer-term debt.

Developed Europe and Latin America will post the biggest increases in borrowings amid stagnant growth and budgetary pressures, including from high energy prices. Despite gas prices in Europe now returning to the levels seen before the Russia-Ukraine war, they remain elevated from an historical perspective as the region gradually reduces its dependence on Russia for its energy needs. High energy costs will put pressure on governments to keep tax relief and subsidies on energy consumption in place at a time when European economies stagnate or even contract. This will come at the expense of wide fiscal deficits and elevated borrowing amid substantively higher financing costs. Some of the European sovereigns, including the U.K., Italy, Germany, and France that are also the biggest global issuers in absolute terms, will increase borrowings in 2023 compared with 2022, issuing on average $300 billion each this year. Weak growth and high spending pressures amid domestic political challenges will also push up government financing requirements for Latin America's largest and third-largest issuers--Brazil and Argentina (see table 2).

At the same time, Asia-Pacific government borrowings will fall in 2023 from their record high levels last year. We expect governments in this region to borrow $3.8 trillion this year, after an estimated $4.2 trillion in 2022. This drop will be driven by easing budgetary pressures from pandemic-related spending. Much of the decline is due to smaller 2023 issuances out of Japan, but also some other major economies--including Australia, China, and India. We also note the exchange-rate effect that reduces the dollar value of local-currency borrowings for sovereigns with depreciating currencies.

Debt will be more costly to service in the era of higher interest rates. While global headline inflationary pressures have eased somewhat at the onset of 2023, core inflation remains stubbornly high. Monetary policies will then likely need to stay tight, keeping sovereign borrowing costs elevated. Issuance costs have more than doubled for major developed market (DM) sovereigns over the last year. That said, and despite the elevated share of inflation-indexed debt for some, it will still take time for the current high market rates to spill into the effective cost of servicing the stock of government debt in many advanced economies. This is because these governments benefit from generally longer-term debt maturities offered by their deep domestic capital markets (see charts 2a to 2d).

EM sovereigns have faced high borrowing costs for over a year now, with many to experience credit stress in 2023 and beyond. Many EM central banks embarked on the tightening cycle earlier than those in DM economies, pushing up sovereign borrowing costs substantially even before government bond yields picked up globally. They have increased further in the past 12 months, with current EM government issuance costs approaching levels not seen in more than a decade. Given the generally shorter debt profiles, the effective interest rates on the outstanding debt stock have also risen fast for many (see charts 3a and 3b). In places where tax mobilization capacity remains weak, higher cost of debt translates into exceptionally high interest burdens, sometimes exceeding one-third of total government revenues (see chart 4). For countries with large debt stocks and reliance on foreign currency borrowings, high interest bills represent a significant risk. We rate a significant number of these sovereigns at 'B' or below, signalling the high risk of debt distress.

The global sovereign debt stock as a share of GDP will increase this year as nominal growth slows and fiscal deficits remain wide. By our estimate, sovereign commercial debt as a proportion of GDP will increase to about 66.1% in 2023 from 63.8% in 2022. This level is notably lower than the pandemic-induced peak of 74% of GDP in 2020. Post-pandemic economic recovery, high inflation, and government efforts to normalize fiscal policies put global commercial sovereign debt on a downward path in 2021-2022. That trend is again on an upward trajectory in 2023 (see chart 5).

By end-2023, we project the commercial sovereign debt stock will reach a record of $65 trillion, the most ever in absolute terms. The G-7 group of nations will continue to contribute slightly less than 70% of the total commercial debt stock of all rated sovereigns (see charts 6 and 7). The U.S. and Japan are by far the largest sovereign issuers. We estimate they will account for about 50% of total global sovereign borrowing in 2023, with the U.S. alone accounting for about 36% of the global total, followed by Japan at 17%.

Investment-grade sovereign borrowing will account for the majority of total issuance. We project that, during 2023, the share of commercial sovereign debt rated 'AAA' (foreign currency rating) will account for a modest 8% of the total estimated commercial debt stock and 6% of total long-term commercial borrowing. Similar to recent years, one-half of all commercial borrowing and the total debt stock will fall into the 'AA' category because three of the top six sovereign debtors fall into this rating category (the U.S., U.K., and France; see chart 8).

The share of the debt stock and long-term commercial borrowing by sovereign issuers rated in the 'BB' category or below (speculative grade) accounts for about 7% of the global total. Brazil, accounting for about $291 billion (or 2.8%) of global sovereign commercial borrowing, remains by far the largest speculative-grade borrower this year. Among all sovereign borrowers, it ranks seventh globally (see table 2). Other big speculative-grade borrowers in the top 20 sovereigns by absolute borrowing volumes in 2023 include Egypt, Turkiye, and Argentina, accounting for a combined 1.7% of the global total.

Sovereign sustainable bond issuance has slightly decreased in 2022. In 2022, the sovereign issuance of green, social, sustainable, and sustainability-linked bonds totalled $91 billion, down 20% compared with 2021. The decline was in line with overall sustainable bond issuance (see "Sustainable Bond Issuance Will Return To Growth In 2023," published Feb. 7, 2023). Also, our figures do not include borrowings by sub-sovereign governments, which may be active in the sustainable bond market. Government borrowing plans for 2023 suggest that issuance of this type of bonds will be slightly lower than in 2022, but we note that historically actual issuance has exceeded initial targets. That said, gross sovereign issuance remains well above its 2020 level. Issuers from DM Europe, including EU member states, remain the key sustainable borrowers from the flow and stock perspectives (see charts 9 and 10).

Methodology

Estimates in this report do not take into account sovereigns not rated by S&P Global Ratings. Since few sizable sovereigns remain unrated, however, we see our data as a reliable reflection of global developments in sovereign debt and borrowing. Our estimates focus on debt issued by a central government in its own name. We exclude local government and social security debt, as well as debt issued by other public bodies and government-guaranteed obligations. In terms of commercial debt instruments, our estimates for borrowing include bonds, issued either on publicly listed markets or sold as private placements, as well as commercial bank loans. We do not include government debt that some central banks may issue for monetary policy purposes. All reported forecast figures are our own estimates and do not necessarily reflect the issuers' projections. Our estimates are informed by our expectations regarding central government deficits, our assessment of governments' potential extra budgetary funding needs, and our estimates of debt maturities in 2023. Estimates that we express in U.S. dollars are subject to exchange-rate variations.

This global report summarizes a series of simultaneously released regional sovereign borrowing and debt reports, which we list in the "Related Research" section below. We have produced detailed reports for developed EMEA, emerging EMEA, Asia-Pacific, and the Americas.

Table 2

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Table 4

Related Research

• Sovereign Debt 2023: Commercial Borrowing In The Americas Stabilizing At Higher Levels Than Pre-Pandemic Years, March 9, 2023
• Sovereign Debt 2023: Asia-Pacific Central Government Borrowing To Fall Below US$4 Trillion, March 9, 2023
• Sovereign Debt 2023: Developed Europe Government Borrowing Estimated At $1.7 Trillion, March 9, 2023
• Sovereign Debt 2023: Emerging EMEA Cautiously Returns To The Markets, March 9, 2023
• Sovereign Ratings List, Feb. 16, 2023, and updated monthly on RatingsDirect