MEXICO CITY – The pandemic continues taking an unfathomable human toll in every continent and yet another set of numbers show an underlying worrisome consequence: a seemly spiraling debt. The latest issue of the Global Debt Monitor showed a staggering milestone: the world’s debt rose to an all-time high of USD296 trillion at the end of 2Q. The study however, regarded as one of the most comprehensive in the industry by offering debt calculations by country, sectors and even households, also brought some additional news and at least one regional surprise.

In comparison with the same quarter of the previous year, global debt rose by USD25 trillion. Therefore, in terms of indebtedness, the bill that the pandemic left is more than the gross domestic product of the U.S. and Mexico combined. Was it worth it? Absolutely. The alternative was to let expenditure drop in tandem with income levels, exacerbating the deepness and the length of the recession. The -3.1% contraction in global GDP in 2020 would have been worse and the 5.9% rebound in 2021 that the IMF projects in its latest World Economic Outlook more modest.

Next question is: Can we afford these debt levels? At three and a half times global GDP, this ratio is higher than the typical mortgage to gross income ratio, but not substantially so – the rule of thumb is between 2 and 2.5 times. What ultimately determines affordability is whether our nominal income (in the case of countries, GDP plus inflation) grows at a faster pace than the financial cost of that debt. For instance, the economic rebound in 2Q21 was so strong that the Institute of International Finance figures show the global debt to GDP ratio falling to 353% from 362% in the previous quarter.

Debt dynamics is a double-edged sword though. Diluting debt by growing faster with low inflation allows interest rates to remain low, then the rates of return for productive projects look comparatively more attractive and thus investment expands, thus providing additional momentum to economic growth. If nominal income is however driven by inflation, interest rates must rise, thus further slowing down growth. This is the reason why stagflation fears are keeping us awake at night, as we have got a glimpse of both possibilities in 2Q21 and 3Q21. We are indeed living interesting times.

I think that as we enter 2022, we will eventually settle in some middle of the ground trajectory. This would mean that our debt problems will not go away easily but neither are insurmountable. Sound policy management will be determinant. Thus, it might be worth keeping in mind a couple of additional features of our current situation.

IIF figures show that government debt was the main driver of the rise in indebtedness during the pandemic. This is particularly the case for the G7+China, which further suggest these countries´ central banks or their own nationals are the holders of that debt. I believe this is the reason why FX markets have remained relatively quiet during the episodes of volatility we have seen throughout 2021. Generational issues might become more relevant than balance of payment issues at dealing with debt dilemmas. This is particularly relevant given the challenging demographic profile that both the G7 and China share.

In Latin America, IIF’s figures underscore debt to GDP ratios in 2Q21 at lower levels than those in 2Q20 for all categories, including government. Country trajectories differ though. Chile and Colombia do show a significant rise in government indebtedness while Brazil remains constant at a relatively high ratio (91.9%). Argentina and Mexico posted significant drops in indebtedness, but from different starting points: to 74.4% from 98.3% in the case of Argentina and to 35.3% from 48.7% in the case of Mexico. This singles Mexico out as the only country which, despite having maneuvering room to increase indebtedness, opted out of this possibility.

Here the notable surprise. Measured by debt, the cost of the pandemic in Latin America has been relatively limited, particularly when contrasted with the heavy human toll and poverty levels. The unusually low impact of the rise in global indebtedness on FX markets was also good news for a region prone to currency crisis. Moreover, when it comes to debt dynamics, demographics offers our countries an advantage vis-à-vis aging countries. However, unless we create jobs at home, workers´ remittances would continue to be the sole benefit of a potentially larger, wasted opportunity.