This report does not constitute a rating action

The surge in sovereign borrowing in 2020, driven by the COVID-19 pandemic, was unprecedented. Yet the fiscal fallout has harmed ratings mainly on sovereigns with limited space to cushion the impact of the crisis. As the pandemic keeps economies under tight lockdowns, delaying the recovery, the additional effort by governments to sustain the world economy will continue to erode fiscal buffers. This could put downward pressure on a wider group of sovereign ratings this year and beyond.

S&P Global Ratings' annual survey of global sovereign debt and borrowing compiles data pertaining to all 135 rated sovereigns. We project that the sovereigns we rate will borrow an equivalent of $12.6 trillion from commercial sources in 2021--approximately one-fifth lower than in 2020. However, 2020 itself is not the best benchmark because the adverse effects of the COVID-19 pandemic and the corresponding fiscal policy responses prompted an unprecedented rise in government financing needs. As a result, in gross terms, rated sovereigns borrowed a historically high $16.3 trillion in 2020--almost twice the amount they had planned to issue before the crisis (see chart 1 and table 1).

Chart 1

Table 1

In net terms, the increase in borrowing was even larger. Actual net issuance in 2020 exceeded the pre-COVID forecast by 2.5x (see chart 2) and reached $10.9 trillion (or over 13% of rated sovereigns' GDP in 2020), highlighting the approximate cost of global fiscal support to economies confronted with the pandemic. The major part of this borrowing was made by a few of the largest economies (see chart 3). Some of these sovereigns also took the biggest hit from the pandemic, resulting in a substantial fiscal fallout.

Chart 2

Chart 3

This borrowing surge resulted in an average rise in central government debt across rated sovereings of 16 percentage points of GDP in 2020 (see chart 4). The rapid rise in debt, as well as other credit factors such as prexisting macroeconomic vulnerabilities, led to negative sovereign rating actions on over 20% of the portfolio that we rate (see "Global Sovereign Rating Trends 2021: Mounting Debt And Uncertainty Underpin A Negative Outlook Bias," published Jan. 27, 2021). However, most downgrades were on sovereigns with concentrated economies and limited capacity to undertake countercyclical macroeconomic policies--most of them in emerging and/or frontier markets.

Chart 4

At the same time, despite a more pronouced rise in debt compared to the global sovereign average, our ratings on developed sovereigns remain little changed so far. Among this group, only Australia and Spain carry a negative outlook, whereas all other rating outlooks on developed market sovereigns are stable. Apart from their inherent credit strengths--strong institutions, economic wealth, and exceptional monetary flexibility--a key support for this rating resilience was that, while debt stocks rose, the cost of servicing it remained relatively stable.

Indeed, supported by the substantial monetary stimulus rolled out by leading central banks, governments in the advanced world have never borrowed so cheaply (see chart 5a). The current market borrowing costs are well below the effective interest rate of the existing debt stock in many parts of the developed world. In addition, accelerated asset purchases by central banks have also changed the investor base for developed market sovereign debt, with monetary authorities becoming one of the largest holders of government debt (see chart 6 for the eurozone).

Chart 5a

Chart 5b

Chart 6

Amid benign global funding conditions and improved monetary crediblity over the past few years, some emerging markets (EM) have also benefited from a declining cost of debt. This has mitigated risks stemming from the growing stock of debt amid COVID-related domestic and external distress. By our estimates, the central government average effective borrowing rate for the 20 largest EM sovereign borrowers will come down to below 4.7% in 2021, compared with 5.1% in 2015.

However, borrowing conditions for frontier markets are more nuanced, with many weaker sovereigns (in Latin America and Sub-Saharan Africa, for example) facing debt sustainability risks, also due to longstanding fiscal challenges including weak tax administration. Among the four largest commercial issuers in Sub-Saharan Africa (Angola, Ghana, Nigeria, and Kenya), for example, interest expenditures as a share of total budget revenue will exceed a very high 40% in 2021, twice as high as six years ago (see chart 7). Apart from a chronic revenue weakness, this also reflects the increasing effective interest rate, which by our estimate will on average increase to over 11.5% in 2021 from around 10% in 2015.

Chart 7

Sovereign Borrowings In 2021 Will Remain Sizable

By our estimates, the global economic recovery and gradual withdrawal of emergency fiscal stimulus will cut sovereign net borrowing needs in 2021 by around two-fifths to $5.8 trillion, or 6.5% of global GDP. However, this will still be substantial in a historical perspective--average global net issuance in the three years pre-COVID-19 was just 2.8% of GDP.

As a result, by end-2021 we project that the commercial debt stock of all sovereigns we rate will rise by 10% from 2020 to reach a record of $67.5 trillion (see chart 8). At the same time, outstanding short-term commercial debt, after a substantial hike in 2020 driven by accelerated short-term issuance of some advanced sovereigns, including the U.S., will remain almost unchanged at $9.7 trillion (about 11% of the total commercial debt stock) in 2021.

Chart 8

Investment-grade sovereign borrowings will account for the overwhelming majority of total borrowings in 2021. We project that, during 2021, the share of commercial sovereign debt rated 'AAA' (foreign currency rating) will account for a modest 7.5% of the total estimated commercial debt stock and 6.7% of total long-term commercial borrowing. Similar to recent years, one-half of all commercial borrowing and the total debt stock will fall into the 'AA' category because three of the top six sovereign debtors fall into this rating category (the U.S., U.K., and France; see tables 2 and 3, and chart 9).

The share of the debt stock and long-term commercial borrowing by sovereign issuers rated in the 'BB' category or below (speculative grade) accounts for around 6% of the global total (see table 2). Brazil, accounting for around $257 billion (or 2.1%) of global sovereign commercial borrowing, is by far the largest speculative-grade borrower this year. Among all sovereign borrowers it ranks at No. 8 globally. Other big speculative-grade sovereign borrowers in the top 20 sovereigns by absolute borrowing volumes in 2021 include Turkey and Egypt, together accounting for a combined 1.1% of the global total.

Chart 9

The stock of sovereign debt across all rating categories has increased steadily over the past decade, but debt profiles vary significantly by region. Excluding the G-7 countries (which distort average trends due to their size), almost 90% of the debt stock of Asia-Pacific and developed Europe, Middle East, and Africa (EMEA) is in local currency and at fixed interest rates. By contrast, between 30% and 40% of emerging EMEA and Latin America's debt stock is denominated in foreign currency, while 70% and 50%, respectively, has been issued at fixed interest rates. Even though our rating analysis captures a complexity of factors, these differences in debt profiles partially explain why sovereign ratings in emerging EMEA and Latin American countries are lower.

According to our calculations, among the bigger sovereigns, Egypt, Kenya, Japan--and quite unusually, the U.S. and Canada--will face the highest rollover ratios in 2021. This is a function of an elevated share of short-term debt, which constitutes over 30% of total debt for Egypt and Kenya, and above 20% for the U.S. and Canada, which issued significant amounts of T-bills during the pandemic in 2020 (chart 10).

Chart 10

The U.S. and Japan are by far the largest sovereign issuers (see chart 11). We estimate they will account for over 60% of total global sovereign borrowing in 2021, with the U.S. alone accounting for over 40% of the global total. They are followed by China, which we forecast will issue around $700 billion in 2021, and Italy, the U.K., France, and Germany, each of which we believe will raise about $300 billion-$450 billion in 2021. These sovereigns together will account for around 17% of the global total, slightly below Japan by itself. The G-7 group of nations will account for approximately 75% of global borrowing and debt.

Chart 11

Green Sovereign Issuance Is On The Rise

Although still limited, the sovereign green bond market has been growing at a fast pace in recent years. In 2020 alone it expanded more than 2x on 2019 to $34 billion (see charts 12 and 13). The governments that issued green debt for the first time last year included Germany, Hungary, Egypt, Luxembourg, Mexico, and Sweden.

We project at least seven sovereigns will tap the green bond market in 2021, with a total estimated issuance of $31 billion, partly driven by policy commitments under the Paris Agreement. This will bring the global green debt stock of 17 sovereigns that have by now issued such bonds to around $114.5 billion in 2021.

Chart 12

Chart 13

Risks Ahead To Fiscal Consolidation

So far, the combination of monetary and fiscal policy employed to combat the pandemic has been effective in providing the support needed to avoid an even larger economic collapse, and has supported the stability of the majority of our sovereign ratings.

For these policies to continue to work--and provided the vaccines work as expected, even against new variants of the virus--the return to sustainable economic growth is paramount. This is because a return to growth will make the adjustments that are needed to stabilize or even reduce debt a lot more feasible (see "Sizing Sovereign Debt And The Great Fiscal Unwind," Feb. 2, 2021).

Our current base case remains that, once the world has achieved a high rate of vaccination (sometime in mid- to late-2021), pent up demand will trigger a strong recovery, bringing output levels close to those in 2019 by 2022, or 2023 in some cases.

In this context, inflation is a risk to the low interest rate environment scenario. It could push central banks to increase interest rates, partially reversing the benefits of low debt-servicing costs. We nevertheless consider this quite unlikely. It is true that there could be a spike in inflation if the world economy reopens, but we believe it will probably be temporary. It is also more likely that central banks will be willing to tolerate some inflation before significantly changing rates. If nothing else, this will help somewhat to bring down debt-to-GDP ratios.

Another variant of risk is that, even after vaccination becomes widespread, the recovery is more gradual than expected, calling for longer periods of fiscal support or a prolonged period of low economic growth. This would make stabilization of public finances more challenging because the social cost would remain high, limiting policymakers' degrees of freedom to make difficult choices.

Finally, there is also a risk that the social cost of the pandemic and the toll it has already started to take on incumbent administrations across the world will reduce the incentives for policymakers to start withdrawing public spending. This would push the likelihood of fiscal consolidation further out on the ratings horizon.

Methodology

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 reliable reflection of global developments in sovereign debt and borrowing. Our estimates focus on debt issued by a central government in its own name. We exclude 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, our estimates for borrowing include bonds, 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 our own estimates and do not necessarily reflect the issuers' projections. Our estimates are informed by our expectations regarding central government deficits, our assessment of governments' potential extra budgetary funding needs, and our estimates of debt maturities in 2021. Estimates that we express in U.S. dollars are subject to exchange-rate variations.

This global report summarizes a series of simultaneously released regional sovereign borrowing and debt reports, which we list in the "Related Research" section below. We have produced detailed reports for developed EMEA, emerging EMEA, Asia-Pacific, and Latin America.

Table 2

Table 3

Table 4

Related Research

• Sovereign Debt 2021: Asia-Pacific Central Governments To Borrow US$4.1 Trillion, March 1, 2021
• Sovereign Debt 2021: Latin American And Caribbean Commercial Borrowing Is Likely To Fall While U.S. Borrowing Rises, March 1, 2021
• Sovereign Debt 2021: Developed EMEA's Commercial Borrowing Could Reach $1.4 Trillion, March 1, 2021
• Sovereign Debt 2021: EMEA Emerging Markets Borrowing To Remain Elevated Versus Pre-Pandemic Levels, March 1, 2021
• Sizing Sovereign Debt And The Great Fiscal Unwind, Feb. 2, 2021
• Global Sovereign Rating Trends 2021: Mounting Debt And Uncertainty Underpin A Negative Outlook Bias, Jan. 27, 2021