This report does not constitute a rating action
Primary Credit Analyst
KimEng Tan Singapore +65-6239-6350
Long-term commercial borrowing by Asia-Pacific governments should drop about 7% from last year, but is still well above pre-pandemic levels.
The drop mostly reflects smaller likely bond issuances by Japan, Korea, and Australia.
China issuance will likely expand this year after last year's contraction.
Refinancing costs will likely rise for lower-rated sovereigns in the region.
This year's borrowings by Asia-Pacific central governments will remain elevated by historical standards but will likely ease from 2021 levels. COVID-19 continues to weigh on fiscal performances at many Asia-Pacific governments, even if higher vaccination rates in most cases limit overall risk to credit support.
S&P Global Ratings projects that the increase in government debt this year will lift total debt to a new high, at above US$20 trillion. While the Ukrainian conflict brings greater uncertainty to our estimates in the Asia-Pacific, at this juncture, we do not believe that it materially changes these projections.
We project that the increase in government debt this year will lift total debt to a new high, at above US$20 trillion
Long-term commercial borrowing should fall to US$3.8 trillion this year, after reaching US$4.1 trillion in 2021. This amount is still well above the sub-US$3 trillion levels in the few years leading up to 2019. Much of the decline is due to smaller 2022 issuances out of Japan, Australia, and Korea.
By our estimates, the drop in Japanese issuance alone is nearly US$245 billion, more than three-quarters of the decline for the region. This comes after 2021 long-term government borrowing rose to a record high of almost US$2.5 trillion. The Japanese government had issued significantly more long-term debt in 2021 to refinance maturing short term bills sold in 2020, when the budget deficit increased sharply. Consequently, long-term borrowing still increased sharply in the year even as the fiscal deficit narrowed to 5.9% of GDP in calendar year 2021, from 9.3% in 2020.
In contrast to Japan, we expect Chinese issuance to rebound in 2022 after a steep decline last year. Chinese economic performance will be tested this year as export growth slows and real estate activity is depressed by deleveraging policies imposed on the sector. To keep economic growth at a reasonable level, the government has committed to maintain a supportive fiscal stance. Our expectations are for the government's long-term commercial borrowing to increase by a little above US$30 billion this year.
Most other major issuers in the Asia-Pacific should see lower borrowing in 2022. Budgetary transfers should fall sharply in Australia and New Zealand as their economies recover amid easing movement restrictions. In India, Indonesia, the Philippines, and Thailand, we expect rebounds in government revenue to follow the ongoing normalization of economic activities as the pandemic becomes a lesser concern.
In contrast to Japan, we expect Chinese issuance to rebound in 2022 after a steep decline last year.
By our estimates, 73% (or US$2.8 trillion) of Asia-Pacific sovereigns' gross long-term commercial borrowings in 2022 will be used to refinance maturing long-term debt (with an original maturity of above one year). Net long-term commercial borrowings should amount to about US$1 trillion this year (see tables 1-3 and chart 1 for more details), declining for the second year in a row.
The projected issuance this year will bring the Asia-Pacific sovereign commercial debt stock to an equivalent of US$20.6 trillion by the end of 2022, up by about US$865 billion from 2021. If we include bilateral and multilateral debt, the total stock in 2022 will reach US$21.1 trillion, about US$0.9 trillion above that in 2021. The share of noncommercial official debt (bilateral and multilateral) in total long-term sovereign debt will likely be around 2.2%.
Investment-grade Asia-Pacific central governments owe almost all sovereign commercial debts in the region. In part, that's because the biggest economies in the region are where sovereigns are rated investment-grade.
The largest speculative-grade sovereign in the region--Pakistan--accounts for just 1% of total Asia-Pacific central government commercial debt. Bangladesh, the next largest, owes less than half of that. The share of debt in the 'BB' category or below is set to account for less than 2.5% of total commercial debt in 2022.
At the end of this year, we project the share of commercial sovereign debt rated 'AAA' at 6.2% of total commercial debt. This is an increase from the 6% share in 2021 and reflects a US$66 billion increase in Australian government debt (see chart 2).
Table 1 | Sovereign Commercial Issuance And Debt
e--Estimate. f--Forecast. Source: S&P Global Ratings.
Japan's debt-rollover ratio (including short-term debt) is set to decline to 75% of GDP in 2022, from nearly 82% a year earlier (see chart 3). The Japanese government has been increasing the average maturity of its Japanese government bond (JGB) issuances after a surge of short-term borrowing in 2020 brought it down to a multi-year low of six years and eight months. In fiscal year 2022 (ending March 31, 2023), it plans to raise the average maturity of JGB issuances by eight months from a year ago, to seven years and nine months.
Japan's use of short-term debt to finance its large deficits of the past two years has helped to keep its interest burden low. As short-term JGBs have been trading at negative yields in recent years, budgetary interest payments have come down despite the sharp increase in total government debt. In fiscal 2021 these payments fell to 7.3 trillion Japanese yen, from 7.4 trillion a year earlier.
Higher inflation in the advanced economies and the associated expectations of rising interest rates also make financing in international markets a challenge.
However, interest rates have picked up in Japan in 2022 in line with global trends. For the first time in several years, the five-year JGB yield turned positive in the first quarter of the year. If the increasing trend is sustained, it may portend higher interest costs for the government. Still, we don't see serious refinancing risks for the Japanese government as the average maturity of JGBs is long at more than nine years.
We expect that the debt rollover ratios for the lowest-rated Asia-Pacific sovereigns to increase in 2022. With their economies continuing to feel the impact of the pandemic, government finances in Pakistan and Sri Lanka remain under strong pressure. Higher inflation in the advanced economies and the associated expectations of rising interest rates also make financing in international markets a challenge. These sovereigns are likely to rely more on short-term domestic financing as a result.
International investors have favored government bonds in northeast Asia over Southeast Asia in recent years. The shares of government bonds held by non-residents have risen in China, Japan, and Korea. In the period between December 2019 and September 2021, Korea saw the largest increase of nearly 3.5 percentage points. Over the same period, nonresident shares of government bond holdings dipped in Indonesia, the Philippines and Thailand. Indonesia saw the largest decline of more than 13.5 percent points.
The debt-rollover ratios for infrequent issuers, such as the Cook Islands, with small but lumpy debt obligations, can be very low if they have little or no debt maturing in a given year, or if those issuers do not have much short-term debt. The rollover ratios of sovereigns that have a higher proportion of official debt tend to be lower, because official debt typically has longer maturities than commercial debt.
These projections only account for the 21 Asia-Pacific sovereigns rated by S&P Global Ratings (see ratings list in table 5). Our estimates focus on debt that is issued by a central government (or a government that we rate using our sovereign rating methodology) in its own name, and in most cases 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 long-term borrowing include bonds with maturities of more than one year issued either on publicly listed markets or sold as private placements, as well as commercial bank loans.
In addition to commercial debt, some of the estimates we use in this study include official bilateral and multilateral debt. We do not include government debt issued by central banks for monetary policy purposes. All reported forecast figures are our own estimates, and do not necessarily reflect the issuers' projections. Our estimates are based on our expectations regarding central government deficits, our assessment of governments' potential extra-budgetary funding needs, and our estimates of debt maturities. Estimates that we express in dollars are subject to exchange rate variations.
Chart 1 | Gross Long-Term Commercial Borrowing By Sovereign (Bil. US$)
Chart 2 | Sovereign Total Commercial Debt In 2022 By Foreign Currency Ratings (%)
Source: S&P Global Ratings.
Chart 3 | Debt Rollover Ratios (% GDP)
Chart 4 | Gross Sovereign Borrowing In APAC In 2022 Will Decrease By 8% Versus 2021
Table 2 | Gross Commercial Long-Term Borrowing
e--Estimate. f--Forecast. SD--Selective default. Source: S&P Global Ratings.
Table 3 | Total Commercial Debt At Year-End (Long- And Short-Term)
e--Estimate. F--Forecast. SD--Selective default. Source: S&P Global Ratings.
Table 4 | Central Government Rollover Ratios And Debt Structure (% Of Total Debt, Including Bi-/Multilateral)
f--Forecast. SD--Selective default. Source: S&P Global Ratings.
AUSTRALIA S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings’credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
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