“Global debt dynamics – III”

The key chart

The key messages

Corporate debt hit a new high in 2021 ($86tr) and increased its market share of total private sector debt (PSC) to 61%, up from 55% at the time of the GFC. The aggregate debt ratio was 105% of GDP at the end of 2Q21, 25ppt above the BIS’ maximum threshold level (albeit below its 4Q20 peak of 110%).

Since the GFC, there has been a significant structural shift away from advanced economies towards emerging economies. Chinese debt dynamics have driven this shift almost exclusively.

China and the US collectively account for 52% of total NFC debt. However, while China ranks #6 globally in terms of NFC indebtedness, the US ranks only #22.

Of the 43 BIS reporting economies, 20 have NFC debt ratios above the maximum threshold. Among advanced economies only seven have “below-threshold” NFC debt ratios – the US, Germany, Italy, Greece, the UK, New Zealand and Australia (note, however, that the last three have “above-threshold” levels of HH debt).

Some of the highest rates of excess NFC growth have occurred in economies where debt ratios are already high and above average – Switzerland, Japan, France, Sweden and Canada. Excess growth has also occurred in other relatively indebted economies – Norway, Spain and Denmark – but at slightly slower-than-average rates. Elevated NFC affordability risks exist in Sweden, France, Canada and Norway.

Among the ten economies that collectively account for almost 80% of total NFC debt, five have above-threshold levels of NFC debt – France, China, Canada, Japan and South Korea. Of these, Japan, South Korea and France have also experienced above-average rates of excess NFC debt growth. Despite low borrowing costs, NFC debt service ratios are above their LT averages in France, Japan, Canada, Germany and the US. In contrast, NFC affordability risks are relatively low in the UK and Italy. Outside this sample, risks associated with NFC indebtedness, excess rates of NFC debt growth, and affordability of NFC debt are noticeably elevated in Sweden.

Corporate sector debt dynamics

Corporate (NFC) debt hit a new record high of $86tr in 2021 (see chart above). It accounted for 61% of total private sector debt (PSC) at the end of 2Q21, up from 55% at the time of the GFC. The aggregate debt ratio of all 43 BIS reporting economies was 105% GDP at the end of 2H21, above the maximum threshold limit of 90% GDP but below the 4Q20 peak of 110% GDP.

Since the GFC, there has been a significant structural shift away from advanced economies towards emerging economies (EM), driven almost exclusively by China’s NFC debt dynamics. Advanced economies still account for the largest amount of outstanding NFC debt (49tr) but their share has fallen from 79% at the time of the GFC to 56% at the end of 2Q21 (see chart above). Emerging economies’ NFC debt totalled $38tr at the end of 2H21, 44% of total NFC debt from 21% at the time of the GFC. Note that China accounts for 71% of EM NFC debt and 31% of total NFC debt alone (see chart below). Excluding China, EMs share of NFC debt is largely unchanged since the GFC.

China ($27tr) and the US ($18tr) collectively account for 52% of total NFC credit. However, while China ranks #6 in terms of NFC indebtedness, the US ranks only #22. Indeed, among the five economies that collectively account for 80% of total NFC debt – China, the US, Japan, France, and Germany – only China and France (#5) rank among the top-ten economies ranked by NFC indebtedness. Once again, debt levels and levels of indebtedness tell us very different things.

Of the 43 BIS reporting economies, 20 have NFC debt levels that exceed the BIS’ maximum threshold. Of these 20 economies, eight also have HH debt ratios about maximum thresholds – Hong Kong, Sweden, the Netherlands, Norway, China, Denmark, Canada and South Korea. The other 12 economies with NFC debt ratios above the maximum threshold are Luxembourg, Ireland, France, China, Belgium, Singapore, Finland, Japan, Chile, Spain, Portugal and Austria.

Note that among advanced economies, there are only seven economies with NFC debt ratios below the maximum threshold – the US, Germany, Italy, Greece, the UK, New Zealand, and Australia. Of these, the final three have HH debt ratios above maximum thresholds however (see chart above).

Some of the highest rates of excess NFC growth have occurred in economies where NFC debt ratios are already high. As can be seen in the chart above, excess NFC growth rates in Switzerland, Japan, France Sweden and Canada all exceed the average excess growth rate for advanced economies despite the relatively high NFC debt ratios in each of these economies. Excess credit growth has also occurred in other relatively indebted economies – Norway, Spain, and Denmark – but at a slower-than-average rate.

Elevated affordability risks in the NFC sector exist in Sweden, France, Canada and Norway. In each of these economies, NFC debt ratios are not only high in absolute terms (above 50%) but they are also above the respective LT averages, notably in Sweden and France.

NFC financial stability heatmap

Important variations exits in relation to the impact of NFC debt dynamics on financial stability among the ten economies that account for just under 80% of total NFC debt (see heatmap above). Note that:

• Five of these economies – France, China, Canada, Japan and South Korea – have NFC debt ratios that exceed the 90% GDP BIS maximum threshold
• Three of these five – Japan, South Korea and France –also exhibit well-above-average rates of excess NFC credit growth
• Despite relative low costs of NFC borrowing, DSRs are above their respective LT averages in France, Japan, Canada, Germany and the US
• Outside this sample, risks associated with the level of NFC indebtedness, excess growth in NFC debt and the affordability of debt are noticeably elevated in Sweden, an economy ranked #16 in terms of the absolute level of NFC debt but #3 in terms of NFC indebtedness.

The next post in this series focuses on household debt dynamics

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.