INTHEBLACK April/May 2024 - Magazine - Page 42
F E AT U R E
of bonds in multiple tranches, which
have been snapped up by eager bond
investors worldwide.
Funding the pandemic crisis responses
involved a monumental transfer
of investment capital to governments.
The capital raised by governments was
then used for economic stimulus packages.
Over a two-year period starting
in March 2020, the Australian
Government progressively issued more
than A$350 billion of bond securities
via the Australian Office of Financial
Management (AOFM) to finance pandemic
measures, including the A$90 billion
JobKeeper Payment program.
READ
CPA Australia’s
Australian
pre-budget
submission
for 2024–25
READ
an INTHEBLACK
article on green
bonds and
sustainable finance
42 INTHEBLACK April/May 2024
INCREASED BORROWING
While the COVID crisis has largely abated,
the need for governments to borrow money
has been increasing over time and does not
appear to be subsiding.
This is apparent from the record number
of government bond issues in 2023, met
by a seemingly insatiable demand from
professional investment managers around
the world. Driving the demand are investors
seeking higher interest rate returns.
In a 2023 report titled A World of Debt,
the United Nations Conference on
Trade and Development (UNCTAD)
notes that global government debt has
been rising sharply over recent decades,
from US$22 trillion (A$33.2 trillion)
in 2000 to a record US$92 trillion
(A$138.8 trillion) at the end of 2022.
According to UNCTAD, at the end
of 2022, around 70 per cent of total
government debt was owed by developed
countries. Yet government debt has increased
at a faster rate in developing countries
due to growing development financing
needs and, exacerbated by COVID,
the cost-of-living crisis, climate change
and limited alternative sources of financing.
“Consequently, the number of countries
facing high levels of debt has increased
sharply from only 22 countries in 2011
to 59 countries in 2022,” UNCTAD says.
“Developing countries face additional
major challenges due to high levels of
external public debt, which makes them more
vulnerable to external shocks.”
UNCTAD defines high levels of debt using
“a representative threshold of a public debt to
GDP ratio of 60 per cent”. The burden posed
by that debt differs across countries.
Credit quality – the ability of governments
to meet their debt repayment obligations
– is a growing concern. More than a dozen
countries have defaulted on their debt
repayments to bondholders since 2020,
and credit ratings agencies have a list
of others on the verge of defaulting.
The US is at the top of the global pile
ending 2023 with almost US$34 trillion
(A$51.3 trillion) of debt. After raising
the debt ceiling to US$31.4 trillion
(A$47.4 trillion) in January 2023, in June
2023 the debt ceiling was suspended until
2025, when US President Joe Biden signed
the Fiscal Responsibility Act of 2023 into law.
While an unprecedented default on
the US Government’s debt was averted,
it was not enough to avoid ratings agency
Fitch downgrading the country’s long-term
AAA credit rating to AA+.
GROWING COMPETITION
FOR GOVERNMENT DEBT
Interest rates were at record lows in early
2022. They have soared since then as central
banks have aggressively lifted their official
rates to dampen surging inflation levels.
The higher fixed interest rates payable on
new bond issues have become increasingly
attractive for many investors, leading to record
inflows into bond market securities in 2023.
Warren Hogan, managing director and
founder of EQ Economics, says the growing
competition for investment capital means
governments will have less flexibility in
the future to raise debt to fund public
services and infrastructure.
“At the moment, the capacity to finance
government deficits has been quite
straightforward and hasn’t put a lot
of upward pressure on interest rates,”
he says. “It’s the future that we worry about.
Can governments respond to the next crisis?
Can they keep record borrowings? Do they
need to try and run less deficits?”
