Jay Sivapalan
Focus on Australia
- Australian government debt jumped by US$163 billion (AU$211 billion) in 2020, equivalent to Hong Kong’s entire national debt
- The increase sees Australia jump two levels higher to 13th position in global public debt rankings
- Australia owes US$30,919 (AU$40,068) per person, half the amount owed by US citizens, and one-third that of British citizens
- Debts will again jump in 2021, adding further US$5,301 (AU$6,870) per person
- But the interest bill has dropped 56% from 1995, and with rates set to remain ultra-low, it is expected to drop a further 45% by 2025
- Despite Covid-19 resulting in a budget deficit of 7.3% in 2020, Australia’s debt to GDP ratio remains among the lowest in the
developed world
Global picture
- Government debts jumped by 17.4% in 2020, rising by US$9.3 trillion (AU$12 trillion), taking on eight years’ worth of borrowing to fight Covid-19
- The increase was equivalent to one seventh (14.8%) of global GDP
- Government debt is worth US$13,050 (AU$16,912) for each citizen
- The biggest economies (US, Japan and China) took on the biggest debts in 2020, but the UK had the largest budget deficit
- But this debt is cheap to finance – borrowing costs have only risen by a fifth in 25 years despite debts 4x larger
- Debts will jump again in 2021, adding US$768 (AU$995) per person
- The steady fall in interest rates has driven dramatic returns for bond investors, but they are now on the rise (meaning bond prices are falling) as the world economy begins to recover
Global government debts jumped by over a sixth in 2020 to a record US$62.5 trillion (AU$81 trillion)
The world’s governments took on eight years’ worth of borrowing in 2020 to fight the global pandemic, increasing their debts by over a sixth (17.4%), according to the first edition of Janus Henderson’s Sovereign Debt Index. As eight in ten countries in the index slipped into recession, governments added US$9.3[1] trillion (AU$12.1 trillion) to their tab. This is equivalent to one seventh (14.8%) of the world’s GDP[2], a bigger slice than was needed to shore up the economy in the aftermath of the global financial crisis.
The world’s government-debt tally ended the year at a record US$62.5 trillion (AU$81 trillion), almost four times its 1995 total (+273%) and equivalent to US$13,050 (AU$16,912) per person[3].
The biggest economies took on the biggest debts in 2020, with Australia adding US$163 billion (AU$211 billion).
Some countries have taken on more debt than others to meet the challenges of the last year. In absolute terms the biggest economies naturally borrowed most. The US, Japan and China alone accounted for more than half of the world’s new government borrowing in 2020.
Australia’s debt profile looks in some ways like its European and North American peers and in others like its Asian peers. Australia added US$163 billion (AU$211 billion) to its national debt in 2020, equivalent to the entire national debt of Hong Kong, pushing its total debt to a record high of US$788 billion (AU$1,021 billion). Since 1995 national debt has risen 420%, which has seen Australia jump two notches in the world’s public debt rankings to 13th position.
While growing its national debt at the same rate as the UK over the last 25 years, the 257% expansion of Australia’s economy during that time – almost three times faster than the UK – has ensured its debt to GDP level is just half of the UK’s at 55%, and 30 percentage points below the world average (at 84%). The figure is among the lowest in the world, and places Australia in the company of its Asian neighbours South Korea and Hong Kong.
Though the world’s governments ran deficits in every one of the last 25 years as spending ran ahead of tax collection, Australia had begun to reign in its outlays prior to Covid-19. However, the pandemic caused the nation to re-evaluate its economic priorities, and eventually saw it post a budget deficit of 7.3% in 2020.
But this debt is cheap to finance
As a respite, the sharply higher borrowing has not increased the burden of servicing all this debt. In 2020, the world’s governments had to pay just 2.0% for their loans[4], compared to 7.6% in 1995.
Australia’s debt per capita increased by US$6,102 (AU$7,908) to US$30,919 (AU$40,068) in 2020, due to the government’s efforts to combat the economic impacts of the pandemic. However, the interest charged to each Australian has consistently dropped by 56% over the last 25 years as average interest rates have fallen from 6.6% to record low levels of 0.9%.
And because of the RBA’s ultra-low rates for longer approach, the interest bill will continue to drop by a further 45% by 2025, even as debt is expected to continue to rise.
The steady fall in interest rates has driven dramatic returns for bond investors
Governments finance their deficits by issuing bonds to investors which can be bought and sold on financial markets. The steady decline in interest rates over the last 25 years has driven significant returns for bond investors. Between 1995 and 2020 the Global Government Bonds Index[5] generated a total return of 308% in USD terms, nearly five times the rate of inflation over the same period.
Matt Gaden, Head of Australia at Janus Henderson said: “The issuance of debt can sometimes be accompanied by negative connotations, but this view misunderstands the importance of government borrowing to support the economy in bad times like 2020. Things would have been far worse had governments not acted to protect millions of livelihoods. While debts are at record levels, lower interest rates have helped cushion the impact of that higher debt.
As we look to the year ahead, we expect the impact of the global pandemic to recede and perhaps even surprise on the upside in terms of economic activity. Coupled with fast recovering consumer and business confidence, this should bode well for investors.”
Jay Sivapalan Head of Australian Fixed Interest at Janus Henderson added: “Bond markets are a huge machine for judging the creditworthiness and economic performance of each country – they determine how much a government can borrow and what rate they must pay. In a sense, they are both the engine and the oil of financial markets. They are not only important for bond investors. The interest rates set in the bond markets affect the value of every asset, from peoples’ homes to stock markets.
“One way or another, everyone has a stake in the bond markets. People can own bonds in their own right, or they can choose to own them via fixed-income investment funds. Bonds help fund retirement incomes for superannuation funds. Insurance companies use them to manage risks and fund payouts. The banking system, mortgages and savings rates all depend on the bond markets. Without the bond markets modern economies simply could not function.
“Investors have enjoyed superb returns from bonds in recent years, with Australian government bonds particularly strong performers. However, record breaking lows in bond yields within the context of 400+ years of bond market history are now behind us. Risk free rates will begin to trend upwards gradually over the coming decade as central banks and governments err on the side of creating a slightly higher level of inflation than perhaps they’ve targeted in the past. At times, the moves in bond yields can be brisk as we have observed this year. Stronger economies tend to be bad news for bond prices and as such it’s prudent for investors to actively manage interest rate risk over the years ahead.”
———-