Why US ballooning public debt is a key concern for Kenya

Underneath President Donald Trump’s infamous tariffs is a growing concern about the increasing debt in advanced economies.

The International Monetary Fund (IMF) recently warned of increased pressure on financial markets for economies such as Kenya.

Yet, as Standard Chartered Chief Investment Officer Europe, Middle East and Africa, Manpreet Gill opines, the biggest concern should not be on the debt level of an economy such as the United States, but inflation, which is foreseen to increase once the effect of the tariffs goes up.

Inflation in the US is likely to have a ripple effect on the shilling’s performance against major global currencies, ending its stellar streak for almost a year now. US debt stands at $36.6 trillion (Sh4,758 trillion), which is 124 per cent of the country’s gross domestic product (GDP).

IMF has warned of  increased debt appetite in advanced economies, noting that its ripple effect would exert fiscal pressures on developing countries due to elevated interest rates in the global financial market.

The Bretton Woods institution says it has noted elevated debt levels in advanced economies similar to the Covid-19 pandemic level, with central banks in these countries doing quantitative tightening. Quantitative tightening is the gradual reduction of money circulating in an economy.

IMF Chief Economist Pierre-Olivier Gourinchas said, while the debt level in these economies came “a little bit down” after the pandemic, it is rising again.

He said this leads to higher debt issuance and contributes to more pressure on long-term interest rates.

“We have seen long-term interest rates rising as the markets have to absorb higher quantities of debt issued by advanced economies,” said Mr Gourinchas during a press briefing on the latest IMF World Economic Outlook.

He said central banks in most of these advanced economies are implementing quantitative tightening, which reduces the overall holdings of long-term debt they have on their balance sheets.

Mr Gourinchas said emerging economies, where Kenya falls, are likely to be impacted by increased debt appetite in advanced countries.

“All this leads to long-term higher real interest rates around the world, and that is impacting funding conditions in emerging and developing economies that face this funding [conditions] and have to basically deal with them,” he said. “And that is adding pressure on the rest of the world.”

Latest updates from the UN Trade and Development (UNCTAD), global public debt rose to $102 trillion (Sh13,158 trillion) in 2024.

“Developing countries accounted for nearly one third of that amount –  $31 trillion (Sh4,030 trillion) – and paid a record $921 billion (Sh120 trillion ) in interests, straining budgets and putting vital public services at risk,” says Unctad in the A World of Debt June 26, 2025, report.

Increased borrowing

The report adds that since 2020, developing regions have been borrowing at rates two to four times higher than the US, mirroring sentiments by the IMF chief economist on the period the institution noted increased borrowing in advanced economies.

This also points to the crowding out effect that the advanced economies have, particularly the US, on the global financial markets regarding debt advanced to developing countries.

“The borrowing costs of most developing countries far exceed those of developed countries. Developing regions borrow at rates that are two to four times higher than for the United States,” says the report by UNCTAD.

“This increases the resources needed to pay creditors, making it more difficult for developing countries to finance investments while preserving their debt sustainability.”

According to the UNCTAD report, bond yields for Africa average 9.8 per cent, the highest globally, while those of the US stand at 2.8 per cent.

According to Standard Chartered’s Gill, higher debt in such economies like the US, while it is a concern, should not be a major one, particularly when the discussion narrows down to the exchange rate, a key factor in US-Kenya economic relations.

He noted that it is hard to draw a short-term connection between the US fiscal deficit and the whole debt debate and the short-term impact on the dollar and interest rate.

Mr Gill referenced instances when the US’ sovereign was downgraded by global credit rating agencies from AAA to AA+.

“In theory, you should have said bond yield should have gone up; actually, they went down,” he pointed out. “And I think that matches what we have seen through long periods of history.”

He referenced previous studies that have analysed data on debt levels of the world’s largest economy, which concluded that higher levels of liability are not the main pain point.

Interest rates

He said an economy such as the US can go for a long time without debt becoming an immediate issue, even to the bond markets. He cited Japan as the current example, whose debt-to-GDP ratio is currently 216 per cent.

“It is not something that we should stop paying attention to,” he said.

Mr Gill said, if the next three to six months are considered, the drivers of interest rates would be the interest in the US market for various reasons. This is where inflation creeps in.

“Inflation will be a much more important driver for bond yields today in the next six months, while debt is a much bigger picture conversation,” he said.

In this case, inflationary pressures are already expected to start going up in the US because of what the IMF explained as negative supply shocks.

“What it does is that it (the tariffs) increases production costs for US domestic firms that have to source a lot of intermediate inputs from countries abroad; and these inputs are now facing tariffs,” said Mr Gourinchas.

He added: “This is a negative supply shock for the US economy. It is going to reduce activity, and gradually it will also translate to higher prices. We are starting to see signs of these higher prices coming through.”