A World Drowning Deeper in Debt
Yopie Hidayat (Contributor)
THE world population will have to accept a bitter legacy of the pandemic. That legacy is an extraordinary amount of debt. These are the fruits of policies taken by the governments all over the world to avoid the collapse of their respective economies.
The Institute of International Finance, a global association that comprises more than 450 major financial institutes, calculated that the ratio of global debt to global gross domestic product will reach 365 percent in 2020, up from 320 percent last year. This is an inevitable consequence, for debt is the only drug that is potent enough to cure the economy.
Because of the injection, the global economy is relatively sound, at least for now. Yes, there is a recession. But the economy has definitely not collapsed. The injection of debt also gave financial markets more vigor compared to before the pandemic. News that vaccination will soon begin, and thus the pandemic will soon be overcome, has swept the markets with optimism.
Stock prices are jumping everywhere. The S&P 500 index in New York keeps climbing, reaching its highest point of all time. Before the pandemic, since its inception in 1957 with 500 stocks as the base for their calculations, this index grows by eight percent per year on average. But in the midst of the pandemic, its growth jumped dramatically. Calculated since the start of the year until the weekend on December 4, the S&P 500 has grown by 14.3 percent, nearly double its normal growth rate.
And just like how strong medicine will have side effects, the same goes with debt. There is a big risk looming over the future. But for now, the market seems to be ignoring it. In the United States for example, the total debt for all corporations, including small to medium enterprises as of July, has reached US$17 trillion. No one can say for certain whether the US economy will be able to keep rolling with such a massive debt burden.
The extremely low interest in developed countries, for now, makes the burden of debt feel light. The cost of borrowing is still cheap. But the irony is, once the economy starts reversing its course and interest goes up in the future, that cost of debt automatically grows multiple times heavier.
The large amount of debt being shouldered by corporations also risks triggering a recession. Businesses that are too burdened with debt will not be able to expand and to recruit, much less to invest. If corporations cannot grow, economic growth will slow down in turn. The labor force is not absorbed. Unemployment rises.
Bigger problems will appear in emerging economies such as Indonesia, because here, debt interest is not as cheap as in developed economies. The serious problems are not only with corporate debt, but also government debt. If the governments of developed economies can borrow with low cost, even at nearly zero percent or free of charge, the Indonesian government must pay a steep cost for its borrowing.
To illustrate, the 10-year Indonesian government bond yield is now at 6.2 percent. Even, compared to its ASEAN neighbors, the Indonesian government must pay much higher interest. The Thai government bond yield with the same maturity, for example, is only 1.3 percent.
The Indonesian government’s burden of debt, which grew so massive because Covid-19, can still be a serious issue in the coming years. A large part of the government’s income will be spent on debt servicing. There will be less room for the government to invest or to fund infrastructure development.
Government finances have been under severe pressure from the pandemic. Earnings dropped sharply, while expenses increased. Since the start of the year until October, the budget deficit to the gross domestic product ratio has reached 4.7 percent or Rp764.9 trillion. It is estimated that throughout 2020, this deficit ratio will go to around 6.3 percent.
The arrival of a vaccine is indeed a relief. It would be fine to say that the pandemic has been overcome. However, there is still no clear way for Indonesia to handle the debt that it left behind.