(Finance) – The borrowing needs of OECD countries it continued to decline by more than 20% in 2022 from its peak levels during the COVID-19 pandemic in 2020. Outstanding debt also decreased from 88% to 83% of GDP during the same period. However, the war in Ukraine has broken this trend and debt issuance is expected to increase slightly in 2023 as many countries have implemented extraordinary public finance measures to protect households and businesses from the increase in prices. This is what emerges from the OECD’s Sovereign Borrowing Outlook 2023.
Despite the general downward trend of the last two years, i debt levels remain substantially elevated compared to pre-pandemic levels. In 2022, loan needs were 43% above the 2011-2019 average, with total debt outstanding ten percentage points of GDP above the average over the same period. “This considerable volume of public debt will have to be repaid or refinanced, and largely soon“, reads the report.
The Paris-based international organization estimates that the gross requirement of debt will increase by about 6% in 2023, to a total of $12.9 trillion, compared to $12.2 trillion in 2022. net requirement of debt is expected to increase in 2023 to $10.6 trillion, from $10.2 trillion in 2022. Outstanding central government debt is expected to remain stable in 2023.
Almost half of the negotiable debt of the OECD – about 23 trillion dollars – will expire in the next three years. Borrowing costs have more than doubled for OECD sovereign bonds since 2021, with the average sovereign bond yield at issuance rising from 1.4% in 2021 to 3.3% in 2022, and looks set to to grow further in the short term.
As a result, countries “face a high refinancing risk and many governments will be spending a higher percentage of their budgets on debt service and may face greater fiscal constraints in the years to come,” the OECD points out.
“2023 marks the end of a long period of favorable financing conditions for sovereign issuers as they adjust to new realities and a rapidly changing market environment exacerbated by the financial and economic fallout from Russia’s war on Ukraine,” said the OECD Secretary-General Mathias Cormann.
According to the report, the request of central bank bonds has largely vanished, leaving the private sector to absorb large volumes of new issues and refinancing. Liquidity in the markets has also deteriorated, potentially increasing funding costs further and offering less flexibility to debt managers.
The document also charts the contribution of sovereign issuers in catalysing sustainable investing. The total stock of sustainable sovereign bonds it now exceeds $325 billion, 75% of which is focused on climate and environmental projects. While the total value of sustainable bond issuance declined between 2021 and 2022, the number of countries issuing such instruments is expanding, with ten new countries joining in 2022 and five more in the first four months of 2023.” Investor demand looks strong and this momentum should continue over the next few years,” it highlighted.