Sunday 26, February 2017 by Nabilah Annuar

Global borrowing to drop by four per cent to $6.8 trillion, says S&P

S&P projects that the 130 sovereigns it rates will borrow an equivalent of $6.8 trillion from long-term commercial sources in 2017, according to its Global Sovereign Borrowing report.

This would be a four per cent decrease in long-term commercial debt issuance compared with 2016, and overall broadly in line with previous years. We forecast gross long-term commercial borrowing to drop to nine per cent of rated sovereigns' GDP in 2017, from an average of 9.2 per cent during the three preceding years.

Every year S&P Global Ratings publishes a survey of global sovereign debt and borrowing, which compiles data pertaining to all rated sovereigns.

According to the research and ratings agency, some 77 per cent, or $5.2 trillion, of sovereigns' gross borrowing will be to refinance maturing long-term debt, resulting in an estimated net borrowing requirement of $1.6 trillion, or 2.1 per cent of the GDP of rated sovereigns.

Net borrowing as a share of GDP has been decreasing gradually from 3.3 per cent in 2014, as a result of governments extending their maturity profiles in a low interest rate environment and gradual improvements in fiscal consolidation in several countries.

Consequently, S&P projects that the commercial debt stock of sovereigns we rate will rise by 2.3 per cent to reach an equivalent of $44 trillion by the end of 2017. We expect that outstanding short-term commercial debt will remain unchanged at $4.7 trillion at year-end 2017, or seven per cent of total commercial debt stock.

The $315 billion reduction in expected gross long-term commercial borrowing from last year is mostly due to a reduced borrowing forecast for some advanced large issuers: Japan (-$270 billion or -15 per cent, in US dollar terms), the Euro zone (-$47 billion or -5 per cent), and the U.K. (-$ 38 billion or -24 per cent).

These reductions stem from some progress on fiscal consolidation, but are largely driven by exchange rate movements. S&P expects many average bilateral exchange rates with the US dollar to be weaker in 2017. We expect the US' gross borrowing needs to rise by $75 billion this year. Other sovereigns borrowing a large absolute additional amount are in emerging markets: China (+$25 billion), Brazil (+$18 billion).

Breakdown by rating category

S&P projects that, during 2017, the share of commercial sovereign debt rated 'AAA' (foreign currency rating) will fall to an all-time low of a mere seven per cent of total estimated commercial debt stock, and six per cent of total long-term commercial borrowing. This share has dropped from our estimate one year ago of around 13 per cent due to the downgrade of the UK to 'AA' in June 2016. Half of all commercial borrowing will fall into the 'AA' category, as five of the top-six sovereign debtors fall into these categories (the US, Japan, China, France, and the UK).

The share of the debt stock and long-term commercial borrowing by sovereign issuers rated in the 'BB' category or below (so-called "speculative grade") accounts for around 7.5 per cent of the global total (see table 2 and chart 2). Brazil, accounting for $191 billion, or 2.8 per cent, of global sovereign borrowing is by far the largest speculative-grade borrower this year. As a borrower it ranks at eighth globally, just behind Germany.

Other big speculative-grade sovereign borrowers include Argentina, Saudi Arabia, Mexico, Russia, Turkey, and Poland, ranked 15 through 20 by absolute borrowing volumes in 2017, accounting for a combined 3.2 per cent of the global total.

Roll-over risks typically coincide with low ratings

According to its calculations, S&P expects Japan to face by far the highest debt rollover ratio (including short-term debt) this year, reaching 66 per cent of GDP.

Japan's high roll-over ratio is a reflection of the highest general government debt ratio among all rated sovereigns, at 254 per cent of GDP in 2016. Furthermore, at 15 per cent, Japan's share of short-term debt in the total is relatively elevated. The majority of advanced economies have a share of between five per cent and 10 per cent of the total.

In terms of rollover needs as a share of GDP, Japan is followed by Barbados (48 per cent), Egypt (29 per cent), Lebanon (28 per cent), and Ghana (25 per cent).

At 142 per cent of GDP, Lebanon has the third-highest government debt ratio (after Greece), which explains the sovereign's high rollover ratio. Greece has a relatively low rollover ratio because of its idiosyncratic debt structure, consisting mostly of extremely long-dated concessionary lending by its Euro zone partners and the European Stability Mechanism.

The very high rollover ratios for Barbados, Egypt, and Ghana is due to being among the five sovereigns with the highest share of short-term debt (between 33 per cent and 38 per cent of total debt, together with Trinidad and Tobago and Papua New Guinea. It is noteworthy that, except for Japan, the top-five sovereigns by rollover needs are all rated at 'B-'. High rollover needs are frequently a reflection of financial stress, where longer term funding is no longer available and public debt piles up.

The debt-rollover ratios for infrequent issuers with small but lumpy debt obligations can be very low if little or no debt matures in a given year and if they do not have a significant amount of short-term debt. Sovereigns with higher proportions of official debt tend to have lower rollover ratios, because official debt typically has longer maturities than commercial debt.

Breakdown by sovereigns

The US and Japan are by far the largest sovereign issuers. We estimate they will account for a combined 60 per cent of total global sovereign borrowing in 2017, followed by China, Italy, France, the UK, Germany, and Brazil, each of which we believe will raise over $170 billion in 2017, but together will account for 20 per cent of the global total, or one third less than Japan by itself.

The G7 nations account for almost three-quarters of global borrowing and debt. Although four Euro zone sovereigns (Italy, France, Germany, and Spain) are among the top-10 borrowers, we expect that Euro zone member sovereigns together will issue only 41 per cent of what the US is likely to issue this year.

The volume of US sovereign debt issuance can be illustrated with the following thought experiment. We assume that all issuance of all sovereigns is distributed evenly over the calendar year. We then ask ourselves at which date the US would have issued as much debt as the equivalent of the annual total of other sovereigns.

By definition, the US will have covered its own yearly borrowing on 31 December 2017. It would have already covered Switzerland's 2017 borrowing needs at lunchtime on 1 January; Brazil's on 30 January, and Italy's on 17 February. At the time of this report's release, the US would have already issued more than any other sovereigns will during the full year 2017, with the exception of China (‘break-even date’ on 28 February) and Japan, whose projected annual issuance the US would reach only in mid-December 2017.

Breakdown by region

In a breakdown by region, Asia-Pacific sovereigns are expected to borrow $2.6 trillion, 38 per cent of the total, (mostly by Japan and, to a lesser extent, China and India), followed by North America (35 per cent) and Europe (19 per cent, including the Commonwealth of Independent States). Latin America accounts for only 5 per cent of the total while borrowing by sovereigns in Africa and the Middle East remains negligible by global comparison.

Inflation-indexed borrowings

About one quarter (33) of rated sovereign issuers engage in inflation-indexed forms of borrowing. These instruments enjoy greater popularity among nations that have experienced bouts of high inflation or hyperinflation, especially Latin America, even if those episodes lie decades in the past. Israel and Chile have the highest share of indexed bonds, where about half of the debt is inflation-linked, followed by Uruguay (40 per cent) and Brazil (32 per cent).

Among advanced economies, the UK has the highest share of inflation-indexed bonds (26 per cent), satisfying stable demand from its large pension sector hedge its long-term liabilities.

Estimates in this report do not take into account sovereigns not rated by S&P Global Ratings. Since few sizable sovereigns remain unrated, however, we see our data as a robust reflection of global developments in sovereign debt and borrowing. S&P’s estimates focus on debt issued by a central government in its own name; it excludes local government and social security debt, as well as debt issued by other public bodies and government-guaranteed obligations.

In terms of commercial debt instruments, S&P estimates for long-term borrowing include bonds with maturities of more than one year, issued either on publicly listed markets or sold as private placements, as well as commercial bank loans. We do not include government debt that some central banks may issue for monetary policy purposes.

All reported forecast figures are S&P’s own estimates and do not necessarily reflect the issuers' projections. The estimates are informed by S&P’s expectations regarding central government deficits, its assessment of governments' potential extra budgetary funding needs, and its estimates of debt maturities in 2017. Estimates that the ratings agency expresses in US dollars are subject to exchange-rate variations.

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