Sovereign borrowing to increase, OECD predicts

Sovereign borrowing needs are forecast to increase this year, according to a report published on Monday by the Organization for Economic Cooperation and Development, or OECD.

The OECD's Sovereign Borrowing Outlook 2023 estimates that gross borrowing requirements for its 38 member states will increase by around 6 percent, to total $12.9 trillion, up from $12.2 trillion last year.

The intergovernmental organization, which consists of member states that cooperate to promote economic growth, development, trade, and investment, attributed the rise in borrowing to a number of factors, including rising inflation, higher interest rates, and concerns about the global economic outlook.

Sovereign borrowing refers to the amount of money a sovereign entity, usually a country, needs to borrow to meet its financial obligations, such as government spending, infrastructure projects, or debt payments.

The OECD suggests the rise in borrowing costs could lead to a number of negative consequences, including slower economic growth, higher inflation, and increased financial instability.

It said OECD countries face greater refinancing risk, and noted many governments will spend a larger percentage of their budgets servicing debt, and may encounter elevated fiscal constraints in the years ahead.

OECD Secretary-General Mathias Cormann said that this year marks the end of a "long period of favorable funding conditions for sovereign issuers" as they "adjust to new realities and a rapidly evolving market environment" that has been "compounded by the financial and economic spillovers" of the Russia-Ukraine conflict.

"These latest developments underscore the importance of credible institutional frameworks for debt management, with the capacity for public debt managers to adapt and respond to shifting market conditions," he said.

Sovereign debt is when a government, or sovereign issuer, borrows money from investors by selling bonds, which in the United Kingdom are called "gilts", and promises to pay back the debt at a later date.

Sovereign issuers typically fund their operations through two main sources: debt and taxes, while privatization of assets is a third, but less common, fund-raising option.

Governments face multiple headwinds, according to the OECD report. It noted that central banks have drastically cut back on bond purchases, forcing the private sector to absorb more debt.

As markets become less liquid, borrowing costs will likely increase and debt managers will have less flexibility to adjust, it said. Emerging and developing economies are especially vulnerable as foreign investors seek safer investments, it added.

According to the Institute of International Finance's Global Debt Monitor, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue rising rapidly.

A recent report from the institute said aging populations and rising healthcare costs continue to put spending pressure on governments, while "heightened geopolitical tensions are also expected to drive further increases in national defense spending over the medium term".

Higher interest rates will likely impact the sustainability of sovereign and corporate debt, according to the World Economic Forum's latest Chief Economists Outlook.