Advertisement

The emerging-market debt binge

Loading up on consumer debt isn't a problem that's confined to the West.

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.

Advertisement - Article continues below

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 Socit Gnrale. 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, saysTom 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 "Asia's dependence on foreign consumers has been replaced by dependence on credit."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," saysCraig 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.

Advertisement
Advertisement

Recommended

Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Beware the hidden risks when investing in emerging markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Emerging markets: buy when the news is bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019
Emerging markets bounce back after a miserable few months
Features

Emerging markets bounce back after a miserable few months

Investors in emerging markets have been enjoying some long-awaited relief after a miserable few months.
13 Sep 2019

Most Popular

An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?
UK Economy

Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?

John Stepek runs his eye over the chancellor's £30bn stimulus package and asks if it's enough to get the economy back on its feet after months of lock…
9 Jul 2020
A first-half home run for investment trusts
Sponsored

A first-half home run for investment trusts

The investment trust sector has seen some extraordinary performance in the first half of this year. Max King looks at what's behind it, and asks: is i…
7 Jul 2020