According to the Organisation for Economic Co-operation and Development (OECD), the outstanding government and corporate bonds around the world last year exceeded $100 trillion due to the rise of interest cost, especially between 2021 to 2024. Its member countries now paid about 3.3% of GDP on the interest, which is higher than their defence budget.
The borrowing cost is currently above what it was before the 2022 rate hike, despite a series of rate cuts by central banks since late last year.This led to debt with low interest cost being replaced with higher rates.. Furthermore, several governments also plan big spending, such as Germany that plans to support Europe’s defense bill.
OECD stated in its annual debt report that the higher borrowing costs and debt can restrict the future borrowing, just when the investment is needed more than ever. OECD noted that despite a sharp incline of interest cost, the rate is still lower than half of market rates in OECD’s countries.
By 2027, about half of OECD countries’ debts and emerging markets’ and a third of corporate debt will be due. The high-risk countries with low income will face difficulty in refinancing their debt as half of them will mature in the next three years, while 20% of their debt is due this year.
Serdar Celik, OECD head of capital markets and financial institutions, stated that despite the high debt cost, governments and corporations still need to produce long-term growth and productivity through borrowing. Failure will lead to more debt along with zero productive capacity growth.
However, the problem is that several companies borrow heavily for financial purposes instead of investing since 2008. OECD urged emerging markets that borrow foreign currency to develop their local capital market. In 2024, the costs of borrowing through dollar-denominated bonds reached 6%, while the cost in junk-rated economies reached 8%.
The challenge is that their low saving rates and shallow domestic markets prevent them from generating money within their border.
As for the funding on the net-zero emissions transition, emerging markets besides China would still be $10 trillion short of meeting Paris climate agreement goals by 2050, even with their current rates of investment, according to OECD’s study.
If advanced economies fund the additional investments, their debt-to-GDP ratios will be 25 percentage points higher. And if their private companies outside China fund it, their debts would quadruple by 2035.
Currently, the foreign investors and households hold 34% and 11% of OECD economies’ domestic government debt respectively, which is higher than central banks. Although their holdings have grown, OECD warned the dynamic may not continue due to high geopolitical tensions and the uncertainties about trade.
