HONG KONG: The combination of continued strong economic recoveries and high inflation will push global government debt slightly lower as a share of GDP this year despite fiscal deficits remaining elevated compared with pre-Covid-19 levels, said Fitch Ratings on Wednesday. According to the rating agency, average annual inflation for rated sovereigns was the highest in more than a decade in 2021, at 3.3%, and is forecast to be 3.2% in 2022. Fitch forecast the median reduction in government debt/GDP ratios that is attributable to inflation this year will be 2.0pp of GDP, matching 2008 for the most significant inflationary effect in more than two decades. Fitch Ratings said that one percent increase in the median for average annual inflation rates to 4.2% would reduce global government debt medians by an additional 0.5pp of GDP, all else equal. Inflation is running higher in emerging markets than in developed markets, but most emerging-market sovereigns have debt denominated in foreign currencies, exposing government debt ratios to risks of currency depreciation that might accompany higher inflation. TLTP
