Markets have found a new ‘favorite’ subject to worry about. Corporate debt levels in emerging markets are spooking both economists and investors. Not that this debt burden came out of nowhere, of course. But, admittedly, there are a couple of catalysts to explain why the EM debt pile is causing some headaches just now. First, the growth of emerging corporate debt is accelerating, and, second, the massive depreciation of EM currencies is exaggerating elevated debt levels. This blog contains 10 (familiar) graphs (taken from familiar institutions like BIS and IMF) to portray these trends.
Chart 1 – The amount of EM corporate debt
Let’s start with the obvious. Just how much emerging market corporate debt is there? Taken from Chapter 3 of the latest World Economic Outlook of the IMF, the chart below reveals the answer to this question is USD 18 trillion, or USD 18 000 billion. Just to be sure, all graphs relate to nonfinancial EM corporate debt. That 18 trillion is roughly the size of US GDP, and also roughly the size of total US government debt. Note that after the outbreak of the financial crisis late 2008, when deleveraging was supposed to take over, EM corporate debt has more than doubled.
Chart 2 – Corporate EM debt-to-GDP
The USD amount of debt is, in itself, not that informative. It’s the relative size that counts. The chart below, again taken from the WEO’s Chapter 3, shows EM corporate debt as percentage of GDP. The graph shows that corporate debt levels have risen from below 50% of GDP to almost 75% of GDP. And, comparable to the previous chart, most of that increase was realized in the years after the Lehman collapse. To put this number into perspective, the US corporate debt-to-GDP level currently stands at 67%, according to McKinsey&Company. Hence, emerging corporates are now more indebted than their US counterparts. On the other hand, it’s also fair to say that the difference in debt level is not extreme (yet), especially when the difference in GDP growth is taken into account. In addition, the corporate debt-to-GDP level in a number of Eurozone countries, like Belgium (136%), The Netherlands (127%) and Spain (108%) is considerably higher (source McKinsey.)
Chart 3 – Per country corporate debt-to-GDP
Corporate debt numbers for emerging markets as a whole conceal massive differences between countries included. Fortunately, the IMF also calculated the rise in corporate debt-to-GDP levels for individual emerging countries. As can be derived from the chart below, bigger emerging countries have seen their debt balloon the most. Three out of the top five ‘debt accumulators’ belong to the BRIC countries (a phrase that has pretty much become obsolete, by the way.) Interestingly, many of the emerging European countries have deleveraged. This can be partly attributed to the fact that, just like developed European countries, emerging countries in Europa already experienced a (foreign) debt crises.
Chart 4 – Debt-to-Equity
Another angle is to compare debt with equity. When nonfinancial companies grow very big relative to their GDP, like in Switzerland for example, the corporate debt-to-GDP ratio doesn’t tell the whole story. The chart below compares EM corporate debt to EM market capitalization. While emerging companies have certainly increased their reach, both domestically and internationally, the growing gap between the value of debt and the value of equity does look a bit worrisome. In 2009, the value of debt and equity were pretty much the same in EM (one could argue if even this level would be desirable), but last year the value of EM debt was 50% bigger than the value of EM equity.
Chart 5 – Local vs Foreign Debt
The previous four graphs show that emerging market corporate debt has grown rapidly in recent years, measured in absolute terms, and measured against the size of GDP and the value of equity. But the pace of accumulation is not the only thing that stands out. Tempted by ever easier monetary policy and lower interest rates in developed countries, emerging companies have also issued more foreign debt. The graph below shows that, for a significant number of emerging countries, foreign debt makes up a significant portion of total debt. In most cases this concerns USD debt. Examples are Mexico, Turkey, Russia and Indonesia. As mentioned before, the emerging countries in Europe are bit different, partly due to their geographic location, but also partly due to earlier (foreign) debt issues (for instance Hungary).
Chart 6 – USD debt
Let’s dig a little deeper here. The chart below shows the accumulation of USD debt over the last ten years. The trend is comparable to the trend in the overall debt numbers, but far more aggressive. Debt levels have gone up swiftly, again especially after the outbreak of the financial crisis.
Chart 7 – Tenfold Rise
In fact, emerging market corporate USD debt has skyrocketed. In a recent research document, Société Générale estimates that by next year EM USD debt has increased tenfold(!) since 2009. As the chart below reveals, China is accountable for a substantial part of that increase, but at the same time it’s also very clear that the rise in USD debt is broad-based. Emerging countries are trying to make the most of low US interest rates.
Chart 8 – Currency depreciation
Issuing foreign currency debt to profit from low interest rates comes with additional risk. Currency depreciation! The JP Morgan Emerging Market Currency Index, an index tracking the value of a basket of emerging currencies, is down 36% since its peak in 2011. For some countries things are even worse. The Brazilian Real is down almost 60% since 2011, while the Turkish Lira has halved in value since 2010. This massive depreciation negatively impacts (USD) debt levels.
The graph below shows that Brazil’s corporate debt-to-GDP level has increased by 7% this year alone as the Real fell 30% against the USD. Also notice the relative low impact for China. China’s debt issue is more a local one, as USD debt makes up a relative small portion of total debt and as China kept its currency pegged to the USD for most of the time.
Chart 9 – Hidden Debt
Chart 9 is about hidden debt. Carmen Reinhart published a very interesting article on the Project Syndicate website, recently, adding to the EM corporate debt woes. She mentions the major infrastructure and mining projects China financed abroad during its local investment and infrastructure boom. Many of these loans don’t show up in the debt tables because they were financed by Chinese development banks which are not included in BIS data. The chart below shows some estimates on the size of these loans to South American countries. These data, however, should be interpreted with care. Also there is now way of tracking which loans ended up with EM corporates or with EM governments. The main point, though, is that for some countries corporate debt levels could be higher than reported.
Chart 10 – It’s all relative!
The tenth and final chart is meant to put things in perspective. The nine previous graphs focused on trends in emerging corporate debt. The final chart below looks at total debt, instead. When government and household debt is taken into account, things look more friendly from an emerging market perspective. In the McKinsey graph below, showing total debt-to-GDP levels, only Greece and South Korea make it to the left side of the table.
Emerging market corporate debt has increased rapidly, especially after the outbreak of the financial crisis. The amount of EM corporate debt more than doubled between 2009 and 2014. During that period, the corporate debt-to-GDP level increased to almost 75%. While this is higher than the corporate debt level of the US, it’s lower than in a number Eurozone countries and has not (yet) reached extreme levels. That said, levels of EM USD debt increased much faster than the overall debt level as easy monetary policy in developed countries seduced emerging markets to issue foreign debt. This foreign debt is pushing up debt-levels since emerging currencies have depreciated heavily against the USD. This trend could continue, if the Fed starts rising interest rates, while GDP growth in emerging markets cools off. This could unnerve investors going forward. On a total debt-to-GDP level, however, it’s the developed world facing the biggest challenges!