The emerging-market debt binge

When investors worry about emerging markets, they tend to concentrate on the big global picture. Their main recent concern has been emerging economies’ vulnerability to tightening US monetary policy, which will prompt money to leave traditionally risky assets and head back to safer markets.

But many emerging markets have internal weaknesses too. In the past few years, households and companies throughout the developing world have gone on debt binges that easily rival the West’s spendthrifts.

It’s not just China. Private non-financial sector debt has reached 200% of GDP in Korea, compared to 180% in Australia and America, notes Société Générale. In Malaysia, Singapore, Thailand and Brazil, private sector credit jumped by over 20% between 2007 and 2012.

Consumers in particular have loaded up on debt. In Malaysia, Korea, Taiwan and Thailand, household debt has reached around 80% of GDP, approximately America’s level. Thai household debt jumped by 88% in the five years to 2012. Loans to buy cars and motorcycles doubled in Asia ex-Japan in 2007-2012.

This is the key reason Asian growth held up after the crisis hit exports, says Tom Orlik in The Wall Street Journal. “Asia’s dependence on foreign consumers has been replaced by dependence on credit.”

Since 1990, there have been 22 banking crises in emerging markets that followed rapid build-ups of private credit, says Capital Economics.

Each caused an average decline in GDP of 8%. The consultancy, currently most worried about China, Brazil, Thailand and Turkey, points out that even if crises are avoided, debt-soaked economies are still likely to face rising defaults and slower bank lending.

There also “remains a real possibility of a much harder landing in the years ahead… if the authorities respond to the threat of weaker economic growth by pumping up credit even further”.

A key problem is that interest rates in some emerging countries have risen, making the debt less affordable. Exports have been very slow to get going amid sub-par recoveries in the West and China’s subdued appetite for raw materials.

“Most emerging market exports have been anaemic at best this year,” says Craig Botham of Schroders. Developing market exports as a whole grew by 4.3% year-on-year in January. The debt boom of recent years, then, is another headwind for investors in emerging-market economies.

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