Sovereign Borrowing Outlook for OECD Countries 2021
25/02/2021 - Sovereign borrowing needs increased massively in 2020 following the outbreak of the COVID-19 crisis as government spending surged and revenue collection diminished. With record-low interest rates reducing the cost of borrowing and robust demand for government securities, sovereign issuers in the OECD area had to adapt their issuance strategies to the changing environment and significantly increase debt issuance without undermining the functioning of sovereign bond markets.
This report assesses the impact of the COVID-19 crisis on sovereign borrowing needs and debt issuance for 2020 and 2021. It looks at how sovereign debt management offices have been dealing with the large and unexpected increase in the borrowing needs of governments, including adjustments made to borrowing strategies and techniques. In view of continued global uncertainties and higher government refinancing needs, the chapter also provides recommendations to assist policy makers in their efforts to navigate through the crisis.
This report forms Chapter 1 of the forthcoming edition of the OECD Sovereign Borrowing Outlook which is scheduled for release on 22 April 2021. The 2021 edition examines sovereign refinancing risk management and the impact of the pandemic on sovereign borrowing in emerging markets.
OECD governments borrowed USD 18 trillion from the markets in 2020 in response to the COVID-19 pandemic, a USD 6.8 trillion increase compared with the previous year. This is the highest single-year increase in both absolute and relative terms in recent history, including responses to the 2008 financial crisis. In 2021, subject to a high degree of uncertainty, government borrowing is projected to rise further to USD 19 trillion.
The combined impact of increased government expenditure and economic contraction has pushed debt-to-GDP ratios to record highs in many countries. The central government marketable debt-to-GDP ratio for the OECD area is set to rise by 16 percentage points in 2020 and at least 4 percentage points in 2021.
While there has been a large and unexpected expansion in the supply of government securities, yields on these securities have declined to record lows, despite the significant market disruption in March 2020. Swift action by central banks has supported the smooth functioning of financial markets and facilitated the absorption of increased debt issuance. In addition, the general flight to safety and subdued inflation outlook have contributed to very low borrowing rates in major advanced economies.
Many sovereign issuers have adapted their financing operations in response to rising borrowing needs and the challenges heightened uncertainity presents for cash flow forecasting and price discovery at auctions due. Existing mechanisms to market have intensified (e.g. the size and number of auctions has increased). In some cases, governments have also expanded the use of syndications, private placements and supplementary non-competitive auctions to gain additional flexibility in respect to financing programmes.
A significant share of pandemic-related government expenditure has been financed by short-term debt in major advanced economies. The average term-to-maturity ratios, which had been trending upwards until 2019, fell in 2020. After a cumulative increase of 1.7 years since the 2008 financial crisis, the average term-to-maturity for the OECD area has declined slightly from 7.9 years to 7.7 years in the past year.
Increased borrowing has also created scope for introducing both new maturity lines and new securities. Importantly, green bonds have become more common with debut issuance by Germany, Hungary and Sweden in 2020.
Despite low interest expenditure, elevated debt servicing levels combined with continued large new borrowing needs have resulted in higher rollover ratios and refinancing risk for many sovereigns in the OECD area. As of December 2020 about one quarter of total marketable debt will mature within one year.
In view of the uncertain global outlook and increased refinancing needs, sovereign issuers may consider rebuilding contingency funding tools; increasing financing capacity through new securities; and, calibrating auction sizes. It would also be prudent, particularly for governments that have significantly increased short-term borrowing, to target rebalancing their financing towards longer-dated tenors.