Emerging market debt sounds alarm bells

  • By Elizabeth Fry

The overall emerging market debt burden - particularly as global interest rates head higher - is setting off alarm bell, warns a Washington-based think-tank.

Global debt grew to a record US$215 trillion - or 325 per cent of the world's gross domestic product - in 2016, driven by a “spectacular rise” in the debt levels in emerging markets, an Institute for International Finance (IIF) report found.

While the developed world has experienced a “relatively modest” increase in debt over the past decade, the debt of emerging markets has jumped to US$56 trillion, equal to 215 per cent of GDP from US$16 trillion or 146 per cent of GDP.

The Washington-based policy organisation said non-financial corporates had driven “this sharp and rapid increase, most of which is in local currency (185 per cent of GDP), with foreign currency accounting for about 30 per cent of GDP".

“While risks associated with currency mismatches may not be as acute as during past emerging market debt crises, the overall emerging market debt burden - particularly as global interest rates head higher - is a growing source of concern,” the institute warned in a report.

Emerging markets have raised nearly US$40 trillion of new debt between 2006 and 2016, a significant acceleration from the roughly US$9 trillion added between 1996 and 2006, the report found.
 

Growing refinancing risk

Global debt was up by US$7.6 trillion in 2016 compared with the prior year and has grown more than US$70 trillion over the past decade. The developed world still accounts for the lion’s share of the debt - US$160 trillion in 2016, or 390 per cent of GDP - but their debt level has increased only 25 per cent since 2006.

The IIF also noted that the US$32 trillion increase in developed market debt was driven largely by governments, with the US and UK public sector debt having more than doubled since 2006. Japan and developed markets in Europe have seen an increase of about 50 per cent in the dollar value of their outstanding government debt.

Over the past decade, outstanding emerging market foreign currency debt has more than doubled to US$7.2 trillion, with the increase being sharpest in Latin American countries, Turkey and South Africa.

The majority of the increase in emerging market indebtedness has been in local currency, which was more than US$48.5 trillion as of the end of 2016 from around US$43 trillion in 2015.

The IIF also warned of a growing refinancing risk as US$1.1 trillion of emerging market bonds and syndicated loans will be maturing through the end of this year. Countries that face the heaviest burden of upcoming dollar-denominated redemptions this year include China and Russia.