An emerging debt Armageddon?

It’s not just developed-world companies – emerging-market firms have been on a borrowing binge too.

It's not just developed-world companies emerging-market firms have been on a borrowing binge too. Their debts have ballooned from $4trn to $18trn between 2004 and 2014, according to the International Monetary Fund, with corporate borrowing as a share of GDP climbing from around 45% to 74%.

China, Turkey, Russia, Korea and Brazil all look vulnerable. Each has seen private-sector debt grow by 30% of GDP in the past decade which tends to imply a banking crisis, says Capital Economics. In Korea and Brazil, around half the increase has come from household borrowing. But this time the fallout should be "less severe than in the past".

Current account positions are stronger, implying less external debt, which means less scope for a banking crisis induced by an external shock. Meanwhile, the debt is mostly financed locally. This avoids a squeeze caused by the local currency falling against foreign currencies. Banks are also in better shape.

But while there may be no "debt Armageddon" in these nations, growth will be pressured for "many years to come, as the legacy of the past decade's boom is worked through". Worries over the corporate debt load, along with declines in commodities and jitters over global growth, are likely to prompt investors to charge governments more to borrow too. Emerging markets face a rocky ride.

Recommended

The charts that matter: bond yields slip while bitcoin tops $60,000
Economy

The charts that matter: bond yields slip while bitcoin tops $60,000

Cryptocurrency bitcoin soared to over $60,000 this week, while government bond yields fell back. Here’s how that has affected the charts that matter m…
16 Oct 2021
Emerging-market central banks take on inflation
Emerging markets

Emerging-market central banks take on inflation

Central banks in Poland, Russia, Mexico and Brazil have been raising interest rates to get ahead of global inflationary pressures.
15 Oct 2021
India: the next global growth engine
Emerging markets

India: the next global growth engine

India's stockmarket is booming, up by 37% so far this year, and the BSE Sensex index has delivered an annualised return over the last five years of mo…
15 Oct 2021
What to do as taxes and inflation rise and the growth-stock bull market ends
Investment strategy

What to do as taxes and inflation rise and the growth-stock bull market ends

The need to pay back our huge debt means higher taxes, higher inflation and, for investors, a return to value. Merryn Somerset Webb explains what you …
11 Oct 2021

Most Popular

Inflation is still one of the biggest threats to your personal finances
Investment strategy

Inflation is still one of the biggest threats to your personal finances

Central bankers and economists insist inflation will be gone by next year. We're not so sure, says Merryn Somerset Webb. So if you haven’t started to …
1 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021