- US debt and short-term refinancing strains are the leading global risks heading into 2027.
- Europe faces rising fiscal pressure and worsening trade tensions with China.
- China needs stronger domestic demand and trade liberalisation, while providing market access.
- Indonesia stands out in ASEAN amid governance, policy, and market-rating concerns.
- An AI bust could hurt investment, but limited leverage reduces systemic financial risk.
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COMMENTARY: IMF Notes: Rising Fiscal Risks
The recently concluded annual meetings of the International Monetary Fund and the World Bank were held under the theme of resiliency of the global economy while facing many shocks. Officials from the public sector and multilateral organisations kept a wary lookout for how long the system can hold up if shocks persist. Five takeaways:
First, the US fiscal situation has overtaken AI bubble, oil price shock, and trade fragmentation as the biggest risk heading into 2027, While the debt situations in Europe, China, and Japan are worrisome, the potential destabilising impulse stemming from the US debt market dysfunctionality is much greater.
The US annual fiscal deficit is crossing USD2trln (6%+ of GDP), with four line-items costing more than a trillion dollars each (Defence, Social Security, Medicare, and interest payment). The IMF forecasts US debt/GDP heading toward 140% by the end of this decade; when unfunded pension liabilities are included, the figure soars past 160%.
The US government is dealing with this right now by moving a large part of the debt issuance toward the short-term, with bills with maturing of a year of less now accounting for a third of total outstanding debt. This is causing even greater debt management risks, with the federal government’s gross funding needs exceeding 40% of GDP. Going past the US mid-term elections, the risks could worsen if the new Congress and President Trump can’t make any progress toward fiscal consolidation. Ideas like gold-backed bonds, financial repression, or encouraging a weakening of the dollar would face considerable resistance from Congress and very likely to backfire.
Second, the Euro Area is dealing with its own fiscal risks, with interest costs rising precisely when the imperative to spend more on infrastructure and defence is rising. France may be at the epicentre of fiscal and political risks, but such pressure could readily spread through the region.
Europe is also grappling with widening trade imbalance with China, and many actions are forthcoming to address that. Europe may demand China to impose voluntary export restraint, put greater restriction on Chinese investment, and may even take additional US-style tariff measures. China would very likely retaliate, risking the relationship between the two superpowers.
Third, China’s faltering domestic demand and excessive reliance on exports are major sources of unease. Countries are likely to ask for market access, tech transfer, and investment from China, short of which trade and other frictions would rise. There will be greater call for RMB appreciation, trade liberalisation, fiscal stimulus, property sector clean-up, as well as social security and labour market reform.
Fourth, within South-East Asia, we did not hear many quibbles other than with regards to Indonesia. Its debt ratings outlook, stock market downgrade by MSCI, recent governance lapses, institutional degradation, and policy indecision are causing considerable concerns. There is little the authorities have done so far to counter the challenging narrative.
Fifth, on AI, the general view was a bursting of the AI stock and investment bubble will be damaging, but not of systemic nature. This comfort stemmed from the lack of deep leverage in the AI ecosystem, especially when it came to bank financing relative to their capital base. AI companies have sensed emerging backlash from governments and the public, stemming from risks to their digital infrastructure and jobs. They are actively calling for oversight, from safety and warning labels to common testing standards, as well as cross-border alignment of regulatory treatment of AI models.
Placement of third-party evaluators inside AI companies to carry out safety checks are on the cards, as is the question of legal liability of the large AI companies with respect to malicious usage of their products.
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