Persistent infrastructure needs, rising demand for services, and high refinancing requirements will keep LRG borrowing high over the next two years. S&P Global Ratings estimates annual gross borrowing will exceed $2.1 trillion in the coming two years (see chart 1). As a result, global subnational debt will reach a record high of $15.8 trillion by the end of 2024, roughly 10% higher than pre-pandemic levels in real terms. We expect the global debt burden will surpass total revenues for the first time in 2023.

Chart 1

Our current forecast for gross borrowings is slightly lower than our previous projections from April 2022. This is largely because of better anticipated budgetary results, on the back of recovery in commodity prices and the positive short-term impact of inflation on LRGs' revenues in many countries globally. As a result, numerous LRGs have accumulated cash buffers, which they may use before building up debt in the coming years. In the longer term, we expect borrowings will resume, since operating spending will catch up with inflation as demand for services and interest costs rise. With the squeeze on operating balances and constrained borrowing capacity, either because of fiscal rules or deficient debt management, we expect that many LRGs globally will scale back their investments in infrastructure, with regions in Australia and Canada being noticeable exceptions.

New Borrowings To Decline, But Remain Elevated Compared With Pre-Pandemic Years

Many LRGs have reduced their borrowing requirements for the coming years, thanks to stronger-than-expected revenue performance and large borrowings in 2021 and 2022 (see chart 2). We also anticipate that formal and informal limitations on subnational borrowings will kick in in many countries, further reducing their borrowing capacity.

Chart 2

We anticipate that Chinese LRGs borrowings will slow down but remain elevated. This is largely because we expect China's recovery to pre-COVID high growth will reduce dependence on fiscal stimulus, but also due to rising interest costs squeezing budgets and excessive debt levels at some LRGs constraining their ability to issue new bonds. In India, we continue to expect that weaker operating performance in the coming years will drive Indian states' borrowing needs (see charts 3-6).

We expect that regions in Australia and Canada will continue to increase their debt stocks, as they progress with large investments in infrastructure, but that the short-term financial gains from higher oil, natural gas, and minerals will slow debt buildup compared with our previous projections. By contrast, we expect German states' gross borrowing to stabilize. This reflects our expectation that German states will scale down their capital plans to adhere to the national debt-brake rule, leading to a more modest debt buildup.

We expect Japanese LRGs will post budgetary surpluses in the coming years, limiting the debt buildup in the sector, although nominal gross borrowings will remain notable due to the large size of the Japanese LRG debt stock. This is underpinned by our expectation that strong revenue growth in Japan will allow LRGs to finance large capital projects without recourse to debt. In other developed market economies, concentrated mainly in Europe, we anticipate that gross borrowings will slow down this year from the record high in 2020, but will resume growth thereafter.

After a sharp increase, we expect gross borrowings in other developed countries to return to elevated pre-pandemic levels. In the Nordics and Spain, this is largely reflecting refinancing needs, while U.K. local authorities will borrow to finance investments in infrastructure, while operating performance is weakening.

Outside China and India, we expect emerging market LRGs will borrow largely for refinancing purposes, with the exception of Central and Eastern Europe, where subnational governments are completing EU-sponsored capital investment projects in 2023. We expect that LRGs' borrowings in the Middle East and Africa will remain constrained by the relatively small size of their budgets, fragmentation of the sector, limited administrative capacity to deliver infrastructure projects, and weak payment culture.

In Latin America, we expect Brazilian LRGs to retire debt, while Argentine LRGs will increase borrowing modestly to finance deficits from rising wage and capital expenditure pressure following the pandemic. Mexican LRGs net borrowings are also likely to stay positive, due to inter-year working capital loans.

Debt Capital Markets Remain The Chief Funding Source

We anticipate global bond issuance will average $1.8 trillion per year in 2023-2024 and cover about 85% of LRGs' funding needs on average. This is similar to the estimated issuance for 2022, but, about 15% lower than the peak in 2021. We expect issuance will remain very concentrated, with about 55% placed by Chinese provincial governments and about 25% by U.S. entities.

In developed markets, most LRGs raise debt directly, except in the Nordics, which typically use public sector funding agencies (PSFAs), as do some Japanese and French LRGs. In most cases, LRGs place bonds domestically in local currency, while PSFAs, Argentine provinces, several non-EU eastern European countries, as well as some Canadian provinces and Australian states place bonds in different currencies. Chinese and Canadian provinces, Australian states, and U.S. public sector entities rely entirely on the capital markets (see chart 7). We expect that bond proceeds will cover more than one-half of Indian, and German LRG borrowings, and that 45% of Japanese LRG borrowings will be issued through own-name bonds (excluding PSFA debt).

Chart 7

In contrast, Austrian, Italian, and U.K. LRGs cover almost all their funding needs by borrowing from the central government and its agencies: Österreichische Bundesfinanzierungsagentur (OeBFA), Cassa Depositi e Prestiti, and the Public Works Loan Board, respectively.

In emerging markets, where stricter limitations on debt intake typically apply, most LRGs rarely tap the international capital markets. Chinese provinces may issue bonds in the international markets but largely via local government financing vehicles (LGFV), while Indian states' bonds are served by the Reserve Bank of India. We note, however, that bonds issued by Chinese and Indian LRGs are mostly owned by domestic investors. Only Argentine provinces and several entities in Central and Eastern Europe have a track record of issuing bonds in foreign or domestic currency, available for global investors.

Subnational Debt Reaches New Peak

Increased borrowing will push global LRGs' outstanding debt to a record high of about $15.8 trillion by the end of 2024. Global LRG debt remains very concentrated geographically, with China and the U.S. comprising close to 60% of the global LRG debt stock by 2024 (see chart 8). Together, Japan, Canada, Germany, and India account for close to 25%.

Chart 8

Total LRGs' debt is set to surpass total revenues for the first time in 2023. Indebtedness varies across LRGs, with Indian and Canadian ones are the most indebted globally, with debt to revenue of close to 200% (see chart 9) by the end of 2024. Compared with pre-pandemic levels, Australian states' indebtedness increased the most, followed by that of Chinese provinces and Indian LRGs. Despite rapidly increasing borrowings, the direct debt of Chinese LRGs still slightly lags that of peers, but including the debt of key state-owned enterprises with high dependence on LRGs, would be similar to that of Canada and India.

Chart 9

Tight Fiscal Rules Will Constrain Borrowings Globally

Despite the increase in global subnational debt, we think there is still room to increase borrowing. In emerging markets outside of China and India, this is because LRG debt doesn't usually represent a large burden on the local budgets or overall general government debt. LRG spending also doesn't largely contribute to national spending to address infrastructure needs. For most emerging market countries covered in this report, LRG debt typically represents less than 30% of total revenue and less than 50% of general government (GG) expenditure (see chart 10). Nonetheless, varying shades of fiscal rules and more challenging external conditions will constrain borrowing in most emerging markets. These LRGs typically not only display low levels of debt burden, but also debt servicing costs (see chart 11). We think this is a result of one or a combination of factors, including weak financial management practices, limited development of domestic capital markets, generally low predictability and transparency of fiscal policy, inefficient equalization systems, and tight restrictions.

On the contrary, in China, where indebtedness is already high, there are no explicit fiscal rules around budgetary deficits, but the central government looks at certain financial indicators while setting the level of annual borrowings for tier 1 governments. We understand that some Chinese LRGs are already in breach of the central government soft guidance on acceptable debt thresholds, constraining faster debt buildup. In India, we consider that the already high debt level is acceptable for domestic investors due to the strong backing of the central bank.

Chart 10

We think borrowing capacity for most subnational LRGs in developed markets is increasing. This is because in many countries, mainly in Europe, fiscal rules limiting debt intake will be restored. This will translate into unaddressed investment needs, since subnational governments in developed countries play a more prominent role in delivering public services and infrastructure at the local and regional level.

We are observing divergence in approaches to debt buildup linked to the rigidity of the fiscal frameworks, with growing discussions around the efficiency of fiscal rules, especially in Europe. In most developed markets, with notable exceptions in Australia and Canada, debt is constrained either implicitly by some form of balanced budgets requirement or by explicit controls over debt intake, such as the debt-brake rule in Germany. While during the height of the pandemic, fiscal rules that limit debt accumulation were suspended to allow for economic stimulus, we expect they will resume in the coming years and hinder debt buildup. Borrowings of Canadian provinces and Australian states are however not constrained by external controls, but rather regulated indirectly by capital markets through interest rates.

Chart 11

Table 1

Table 2

Countries Covered In This Report

Our survey on global LRG borrowing encompasses 46 countries: Argentina, Australia, Austria, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, China, Colombia, Croatia, Czech Republic, Denmark, Finland, France, Germany, India, Indonesia, Israel, Italy, Japan, Jordan, Kazakhstan, Latvia, Mexico, Morocco, New Zealand, Nigeria, North Macedonia, Norway, Pakistan, Philippines, Peru, Poland, Romania, Serbia, South Africa, Spain, Sweden, Switzerland, Thailand, Türkiye, Ukraine, the U.K., the U.S., and Vietnam. We consider this sample representative of global LRG debt. We have also published separate and more detailed analyses of projected borrowings in the LRG sectors of various regions (see the Related Research section below). We have excluded Russia in this year's report.

We base our survey on data collected from statistical offices as well as on our assessment of the sector's borrowing requirements and outstanding debt, which includes bonds and bank loans. The reported figures are our estimates and do not necessarily reflect the LRGs' own projections. For comparison, we present our aggregate data in U.S. dollars.

Related Research

• Subnational Debt 2023: Real Emerging Market Borrowing Is Set To Ebb Despite Elevated Chinese And Indian Debt, March 6, 2023
• Subnational Debt 2023: Developed Markets Display Different Fiscal Policies, Divergent Borrowings, March 2, 2023
• Subnational Debt 2023: Global Capital Expenditure To Moderate, March 2, 2023
• Subnational Debt 2023: The Best-Placed Local And Regional Governments To Handle Rising Interest Rates, March 2, 2023
• Subnational Debt 2023: An Easing Burden In Germany, Austria, And Switzerland, March 2, 2023
• Subnational Debt 2023: Australian States Navigate Crosscurrents Of COVID, Coal, And Capex, Feb. 26, 2023
• The Clock Is Ticking For The Debt-Led Growth Of China Local Governments, Feb. 21, 2023
• Canadian Local And Regional Government Debt: Economic Headwinds Will Slow Debt Sustainability Efforts In Fiscal 2024, Feb. 14, 2023