Increasing debt levels are a major source of vulnerability for boom-to-bust prone emerging markets. In its latest Global Financial Stability, the IMF highlighted its concerns for rising debt levels in emerging markets, particularly for corporations seeking cheap dollar financing. (Link)
The IMF report points out that external debt ratios have deteriorated to levels that in the past have signaled high risk, as shown in the two charts below. The IMF’s concern is that this funding will dry up when there occurs a shift in global liquidity conditions.
An important measure of vulnerability for emerging market debtors is the recent rate of debt accumulation. The charts below show the five and ten-year increase in debt-to-GDP ratios for the primary emerging markets. The first chart shows total debt (public and private), while the second chart shows only private debt. Any increase in total debt/GDP ratios of 5-10% during a mere five years can be considered to be excessive and a considerable source of risk. As we can see in the first chart below, China and most of Latin America have been the worst abusers in the past five years. This accumulation of debt is bad in itself but made even worse by the use of the debt: in China, mainly for sustaining low-return investments by state firms; in Latin America, to sustain public sector current expenditures and capital flight.
The accumulation of private debt, shown in the second chart, points to several critical stress points: China, Turkey, Korea and Chile. Chile, which is currently undergoing a severe political crisis that will have an impact on confidence and growth, should be an area of particular concern.
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