Debts could crimp growth prospects in emerging markets

Outlook

Ten years of ultra-loose monetary policy have encouraged unprecedented debt accumulation.

Corporate debt accounts for 104% of emerging markets GDP, from 60% in 2008. In China, it is 162.5% of GDP. In Turkey, Mexico and Indonesia it has nearly doubled or more. As monetary conditions tighten, funds will be diverted from productive investment towards costlier interest payments, dampening potential growth.

Emerging markets household debt has doubled from 23% of GDP to near 40%. It is more than 66% of South Korean, Thai and Malaysian GDP and has almost doubled or more in China, Russia, Turkey, and Poland. As well as constraining spending, indebtedness could accentuate political polarisation, reducing reform implementation.

Impacts

• EM fundamentals are stronger -- price stability gives scope to adjust rates steadily while better balances and more reserves reduce risks.
• Turkish reserves cover just 90% of debts due in 2018; in Argentina, Malaysia and the Ukraine, reserves are close to the ‘safe’ 100% ratio.
• Banks have lent out more than they hold in deposits in Turkey, Mexico, Colombia, Chile and South Africa -- raising banking sector risks.
• Foreigners own 50%+ of South Africa’s government bonds, 40% of Indonesia’s and 30% of Malaysia’s -- this liquidity raises sell off risks.