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Private beats public on EM debt concerns

Emerging market debt levels are on the rise. Public sector debt has grown substantially, largely from countries reliant on commodity exports. However the real concern is over EM private sector debts, which since the financial crash have been steadily increasing.

Jun 15, 2016 // 5:23PM

In Q1 2016 total EM debt amounted to over 215% of GDP, increasing by US$3tn year-on-year from Q1 2015 to US$52tn across 20 EM economies according to the IIF.

Although there has been a slight rise in EM public debt, which the IIF puts at around US$85bn from sovereign debt issuance alone in April this year, William Jackson, Senior EM Economist at Capital Economics noted that many EM public finances have been in better shape than their DM counterparts over the past 10 years.

“Debt ratios have been lowering across EMs and fiscal management has been relatively good.”

He noted however that commodity exporters have recently seen a deterioration in their public finances.

The IIF noted that Brazil and South Africa had recorded some of the largest debt increases over the past year. Nevertheless, “there are no public sector debt crises within our forecast,” Jackson stated.

 The rise of private sector debt appears to be of more concern. Turkey, despite having low public sector debt, faces high private sector leverage alongside Brazil and China.

“Ratios have risen very quickly over past decade, at a scale which in EMs is usually followed by crises in the banking sector.”

Jackson added that Turkey’s private sector debt bubble has yet to burst like Hungary’s did during the 2008 financial crash, but noted that as a sizeable proportion of the country’s private sector debt is FX-denominated (US$291bn according to the IMF), cause for concern.

“If Turkey’s debt bubble bursts investors would likely pull out, weakening the lira and causing FX debt burdens to rise. This would add further pressure to the country’s banking sector.”

The main driver for the rise in private sector debt can be attributed to the aftermath of the 2008 financial crash, which saw a period of loose fiscal policy, especially in countries such as Turkey and Brazil.

“Despite the need to recover from the crash, interest rates were kept too low for too long.”

Public sector debt levels on the other hand have been driven by the more recent collapse in commodity prices. Year-to-date, sovereign bond and loan transactions have increased almost threefold over the same period last year to US$230bn.

“The impact of commodity prices is perhaps one of the main reasons why Brazil’s economy has performed so poorly over the past two years,” Jackson said.

He added that declining revenues from low commodity prices led to a shrinking of nominal GDP (down from 10.6% in 2013 to a predicted 3.5% this year according to the OECD) and a decline in government revenues, which has caused the country’s budget deficit to widen to 10.4% of GDP in 2015 according to data compiled by Trading Economics.

“This has resulted in the government turning to debt issuances,” Jackson stated. Brazil issued its latest sovereign Eurobond, a US$1.5bn deal, in March this year.

Other commodity exporters have experienced similar difficulties in Brazil. At the same time, Gulf states and certain African nations have all run large budget deficits which they are now funding by raising new debt.

Sovereign issuances to fund growing budget deficits across the Middle East have been very prevalent as of late. Abu Dhabi issued US$5bn in April, Qatar tapped the markets in May for US$9bn and Oman issued US$2.5bn in June.

South Africa’s debt ratio has risen on weak growth, and the country currently faces a large deficit which amounted to 4.20% of GDP last year according to Trading Economics.

Argentine government debt issuance contributed significantly to the increase of sovereign debt in 2016, particularly its US$16.5bn bond in April, which has since been followed by a number of quasi-sovereign issuances.

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