OECD Sovereign Borrowing Outlook 2019

Executive summary

Outstanding central government debt in the OECD area is double that of pre-crisis levels

The Global Financial Crisis (GFC) marked a watershed in the evolution of sovereign debt in the OECD area. The fiscal and monetary policy responses to the GFC have had important implications for both sovereign debt levels and funding conditions in most OECD countries. The sustained borrowing needs of OECD governments over the past decade mean that outstanding government marketable debt has doubled in nominal terms, from USD 22.5 trillion in 2007 to USD 45.2 trillion in 2018.

Gross borrowings, which peaked at USD 10.9 trillion in 2010 in the wake of the GFC, are set to reach a new record level in 2019 by exceeding USD 11 trillion. More than 80% of this amount will be used to repay bonds maturing in 2019. The remaining amount will finance deficits in government budgets. This means that outstanding central government marketable debt for the OECD area as a whole is projected to reach USD 47.3 trillion in 2019. While government funding needs in the wake of the GFC increased in most OECD countries, the recent further increase is confined to a few countries, particularly the United States.

The favourable differential between cost of debt and growth rates means that the growth of debt-to-GDP ratios has slowed

The central government marketable debt-to-GDP ratio in the OECD area jumped by 23 percentage points from 49.5% in 2007 to 72.6% in 2017. While the new debt issuance is set to increase the nominal level of outstanding central government debt further, the relevant debt-to-GDP ratio is projected to remain unchanged in 2019 at 72.6%, mainly owing to economic growth in the OECD area. Compared with pre-crisis levels, the interest rate-growth differentials – the difference between the interest rate paid to service government debt and the growth rate of the economy – in the major OECD countries have improved significantly and this has slowed growth in debt-to-GDP ratios in recent years. The improvement is more marked in the G7 economies. At the same time, debt burdens have been on an upward trend in all G7 countries except Germany.

The impact of interest rate changes on the cost of sovereign debt depends on several factors

Global financial conditions are loose overall, but have tightened considerably during the past year. The impact of higher interest rates on the cost of debt is expected to be relatively low in countries where new borrowing needs are limited and the share of fixed-rate debt with long maturity is high. In terms of sovereign borrowing needs, countries in the OECD area present divergent paths. While some countries (e.g. Denmark, Iceland, New Zealand and Sweden) have achieved limited or declining funding needs, budget deficits in a few countries, particularly the United States, have continued to grow in recent years. In terms of maturity and interest rate structure, the composition of sovereign financing in the OECD area has remained tilted towards long-term fixed-rate securities over the past decade. The weighted average-term-to-maturity of outstanding marketable debt, for instance, increased from 6.2 years in 2007 to almost 8 years in 2018. This implies a slower pass-through of changes in market interest rates to government interest costs.

Sovereign issuers have clearly benefited from favourable funding conditions to strengthen the resilience of debt portfolios to potential future shocks. Nevertheless, OECD governments will need to refinance around 40% of their outstanding marketable debt over the next three years, with G7 countries facing particularly significant volumes of scheduled redemptions. A lower level of involvement of central banks as large buyers should lead to increased funding needs from other investors. Against this backdrop, sovereign debt management offices should maintain close communications with investors and other policymaking authorities, especially by re-engaging with traditional investor bases such as pension funds and insurance companies. Elevated uncertainty and the changing funding environment point to an increasing relevance of contingency funding tools such as liquidity buffers and Treasury Bills.

A deterioration in the market liquidity of government securities has led sovereign debt managers to adapt their practices

Liquidity conditions in government securities markets have been volatile, reflecting a confluence of factors. These include: financial sector adjustments to post-crisis regulations; unconventional monetary policies; changes in composition of the investor base; the proliferation of electronic trading venues and strategies; and shrinking borrowing requirements in some countries. Many sovereign issuers see a relative improvement in liquidity conditions, but report that they are still worse than in the pre-crisis environment.

Reduced liquidity of government securities impairs primary market access and increases borrowing costs for sovereigns. This has led sovereign debt management offices in countries experiencing a deterioration to implement various measures to support liquidity conditions in recent years. These measures include changes to frequency and size of auctions; obligations and privileges of primary dealership systems; secondary market activities such as buy-backs and switches and securities lending facilities (SLFs). This edition takes an in-depth look at SLFs used by many debt management offices and provides a detailed set of policy and management information about how sovereign issuers act as a lender of last resort for government securities, and promote secondary market liquidity by helping market participants continuously quote prices and avoid delivery failures.