Executive summary

Borrowing needs of OECD governments are expected to stabilise somewhat in 2022 after rising rapidly in the wake of the pandemic

Fiscal responses to the COVID-19 crisis have necessitated significantly increased issuance of marketable debt over the last two years. In the OECD area as whole, central government gross borrowing requirements, which had remained stable at around USD 9.5 trillion after the 2008 financial crisis, stood at USD 16.4 trillion in 2020, and USD 15.1 trillion in 2021. In 2022, OECD governments are expected to borrow approximately USD 14.4 trillion from the markets, a small decrease compared to the previous two years markedly higher than pre-pandemic levels.

It is important to note that the share of net borrowing – the amount to be raised to cover the current budget deficit – in gross borrowing has significantly reduced, reflecting the gradual improvement in fiscal balances. While net borrowings constituted 50% of total borrowing in 2020, the ratio decreased to 20% in 2021, and it is expected to remain at around the same level in 2022. In absolute terms, central government net borrowing requirement for the OECD area is estimated to be around USD 3 trillion in 2022, double pre pandemic levels.

As countries are emerging from the pandemic with high levels of debt, debt servicing may pose challenges for sovereign issuers

Although the strong economic recovery in 2021 somewhat eased the government debt burden – which surged by more than 16 percentage points in 2020, the debt-to-GDP ratio remains at record high levels in many countries. In this context, the legacy of COVID-19 casts a long shadow on public finances with a significantly high debt to service. Despite the lengthened average-term-to-maturity of outstanding debt, an important indicator of refinancing risk across OECD countries, the amount of debt to be repaid or refinanced is considerable. Governments in the OECD area expected to redeem more than USD 20 trillion worth of maturing debt by the end of 2024.

Recently, financial conditions in the OECD area have tightened amid less supportive monetary policies and aggravated inflationary pressures since the outbreak of the war in Ukraine. For example, average 10-year government bond yields in large advanced economies have increased by more than 1.2 percentage points since January 2022. Going forward, the war in Ukraine is expected to slow the global recovery from the COVID-19 pandemic and further push up inflation worldwide. In addition to already rising policy interest rates, major central banks have revealed plans to unwind their large balance sheets, which would weigh further on yields on long-term bonds and cause an adjustment to the investor base of government debt in several jurisdictions. In this context of elevated uncertainty and a changing funding environment, this Outlook highlights the importance of effective communications, both by debt management offices and central banks, to cope with potential challenges in government securities markets. The Outlook also recommends that sovereign debt management offices closely monitor the resilience of market intermediaries and co-ordinate with the relevant authorities to promptly address possible stressed market conditions.

With deteriorated credit conditions, emerging market and developing economies are facing greater challenges

Since the outbreak of the pandemic, emerging market sovereign debt has been undergoing a structural decline in credit quality, as a record number of countries in these country groups have been downgraded. This Outlook indicates that sovereign debt issued by emerging market and developing economies with an investment grade has been shrinking since the outbreak of the pandemic. At the same time, their borrowing costs have been on the rise since the second half of the 2021.

With deteriorated credit conditions and high refinancing needs, emerging market economies are facing greater challenges. First, the tightening of global liquidity may erode investors’ risk appetite towards emerging market economies, which in turn would make accessing international capital markets more difficult for those sovereign issuers. Second, spill-overs from the war in Ukraine are likely to aggravate existing challenges. Rising global energy and food prices, as well as slower global growth as a result of the conflict will negatively affect the economic prospects of emerging market and developing economies. An interaction of the major downside risks would pose considerable challenges for debt management in especially low-income countries with limited room for manoeuvre. In this context, lending and other financial support to these countries, such as grant facilities by international financial institutions, will be critical in terms of the sustainability of their debts and in supporting their economies.

A growing number of sovereign issuers are taking a role in supporting government sustainability agendas amid increased efforts to address the dual crises of COVID-19 and climate change

As Environmental, Social and Governance (ESG) related risks and concerns are growing in importance across all jurisdictions, many governments are including environmental, sustainability, and socio-economic objectives in their policy packages. Public debt management, as an interface between government and financial markets, can play an important role in supporting government sustainability agendas by conveying government commitments to improving environmental and social outcomes to investors and issuing ESG-labelled bonds. This approach has spread rapidly among OECD countries in recent years, in line with increased efforts by countries to address the dual crises of COVID-19 and climate change.

Drawing on a survey of OECD and selected non-OECD countries, this Outlook indicates that, when issuing labelled bonds, sovereign debt managers face a number of challenges including a lack of expertise in this area and a lack of availability of eligible projects in budgets, as well as compliance with impact and other reporting requirements. Leading practices to date highlight the importance of stakeholder engagement including cross-department collaboration and communication with market participants, commitment to transparency and reporting disclosures and to sustaining liquidity through issuance volume and instrument design. For sovereign issuers in emerging markets, labelled bonds present the benefit of attracting international investors by meeting their criteria for transparency and ESG issues. However, if not managed properly, this could create further vulnerability for issuers due to the increased currency risk associated with issuing foreign-currency debt.