Global outstanding government and corporate bonds surpassed $100 trillion last year, according to the Organisation for Economic Co-operation and Development (OECD) on Thursday. The surge in interest costs is forcing borrowers to make difficult decisions, prioritising investments that drive productivity.
Between 2021 and 2024, the cost of interest payments as a percentage of economic output jumped to its highest level in two decades, the OECD revealed in its global debt report. In member nations, government spending on interest payments climbed to 3.3 per cent of GDP, surpassing defence expenditure.
Although central banks are now reducing interest rates, borrowing costs remain significantly higher than they were prior to the rate hikes of 2022. The replacement of low-interest debt continues, meaning that interest expenses are expected to keep rising.
This comes at a time when governments are facing substantial spending demands. For example, Germany’s parliament recently approved a large-scale infrastructure plan and a broader European defence spending push. Additionally, ongoing expenses related to climate goals and ageing populations pose challenges for major economies.
The OECD warned in its report that the combination of higher debt and rising costs may limit the ability to borrow further, especially at a time when investment needs are more critical than ever.
Despite the increase in interest costs, they still remain below current market rates for more than half of OECD countries’ and nearly a third of emerging markets’ government debt. Similar trends apply to high-grade corporate bonds and nearly three-quarters of junk corporate debt, according to the report.
Approximately half of government debt in OECD countries and emerging markets, along with around one-third of corporate debt, is set to mature by 2027. Low-income, high-risk countries are facing the most significant refinancing challenges, with over 50 per cent of their debt due within the next three years and more than 20 per cent maturing this year.
Serdar Celik, head of capital markets and financial institutions at the OECD, stressed the importance of ensuring that borrowing promotes long-term growth and productivity. He noted that if debt is not used for productive purposes, the challenges ahead could worsen.
Since 2008, companies have increasingly turned to borrowing for financial activities such as refinancing or distributing payouts to shareholders, while corporate investment has been in decline, the OECD report noted.
Emerging markets reliant on foreign currency borrowing are urged to develop their local capital markets. The OECD highlighted that the cost of borrowing through dollar-denominated bonds has surged from around 4 per cent in 2020 to more than 6 per cent in 2024, and exceeds 8 per cent for higher-risk economies. These nations often struggle to tap into domestic savings due to low savings rates and underdeveloped financial markets.
The OECD also pointed to the immense challenge of financing the transition to net-zero emissions. Emerging markets outside China face a $10 trillion investment shortfall to meet the Paris Agreement’s climate goals by 2050, if investments continue at their current pace.
Should governments finance these additional investments, debt-to-GDP ratios could rise by 25 percentage points in advanced economies and by 41 points in China by 2050. If financed by the private sector, energy companies in emerging markets outside of China would need to see their debt quadruple by 2035.
The report also noted that while central banks have reduced their bond holdings, foreign investors and households have stepped in, now holding 34 per cent and 11 per cent of domestic government debt in OECD economies, respectively, compared to 29 per cent and 5 per cent in 2021.
However, the OECD cautioned that these trends may not persist. Geopolitical tensions and trade uncertainties could rapidly alter risk appetites, potentially disrupting international financial flows.
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