Levels of global debt have unsurprisingly risen alarmingly as a result of the pandemic. This is true of both individual companies and also entire countries. At the entity level, in a number of countries governments have taken extraordinary steps to make debt financing available, usually with extremely low interest rates and also a maturity date some years into the future. This is a critical short-term measure which by making cashflow available buys time for businesses that would otherwise fail. The same is true for countries. International bodies such as the International Monetary Fund (IMF) have been extraordinarily busy providing emergency finance as a life-support mechanism to keep entire nations afloat. The figures involved are truly staggering. The Institute of International Finance (IFF) announced this week that global indebtedness is now in excess of $277 trillion (I can't begin to visualise how many zeroes that number contains…). I was though surprised to read that this is 'only' an increase of $15 trillion this year. Nevertheless, by the end of 2020 the IFF expects global indebtedness to be about 365% of global GDP as opposed to 320% at the beginning of the year.
There is a disproportionate impact on developing economies. Zambia has just become the sixth country this year to default on or restructure its debts. I worked in the country a couple of years back. It is well blessed with natural resources and appeared to be compared to other countries in the region fairly well run from a financial perspective. It will provide an interesting test case in that a good chunk of the debt is owed to Chinese investors who have become increasingly prominent in the new international order over the past few years. How they handle the restructuring proposals will be revealing; when Sri Lanka defaulted on a debt back in 2018 the end result was that a key port on the island effectively passed into Chinese management. This did not however prevent the government returning to China as a lender rather than the IMF, the traditional lender of last resort, when the economy hit problems earlier this year.
So far this year, the G20 group of the world's largest economies has launched initiatives which have allowed payments of about $5 billion to be deferred, a move that has impacted on about 46 countries. But whilst that seems a lot of money to you and me, it is a drop in the global indebtedness ocean. Analysts suggest that much more needs to be done. There is indeed a complicating factor which is perhaps easy to overlook in that many countries are suffering a double whammy in that they are being forced to increase spending on key areas such as health provisions (hospitals, drugs, vaccines etc.) whilst at the same time tax revenues are plummeting. The fiscal impact of these two mutually disadvantageous factors is potentially very serious.
All of this has a knock-on future effect. It will take years for economies to recover from the fallout of the pandemic even when it is finally we hope brought to an end. The legacy of the pandemic will be with us for some time and one aspect of it will be increased levels of indebtedness. Debt has to be serviced and normally interest paid on it, which even if rates are very low can still amount to a lot of money. And of course at some point principal needs to be repaid and that can pose substantial challenges from a cashflow perspective. This is an issue not only from a national perspective but also from an entity-level point of view. Many companies in for example the UK, the US, Australia and others have benefitted from government loans or guarantee schemes but debt borrowed in a crisis situation is a sticking plaster rather than a permanent cure. Companies are in future going to have to set aside funds to repay debt principal and interest as their first port of call against future profits. Accountants and finance staff are going to be dealing with the effects of the pandemic for many years into the future.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.
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