Private debt in emerging markets
Despite concerns about the rapid growth of private sector debt in emerging markets (EMs), fears that a debt crisis will engulf the entire emerging world are overdone, according to Capital Economics. However, financial risks are building in several countries, including larger emerging markets like China and Brazil.
Between 2000 and 2010, private debt in 19 of the world’s largest emerging economies rose by about $10tr (R117tr), according to Bank for International Settlements (BIS). In the five years since, it has expanded by a further $5tr (R58tr), and private debt is on course to increase by $30tr (R350.5tr) between 2010 and 2020, according to the BIS.
These numbers should not be read in isolation, Capital Economics said. Firstly, the focus should be on the pace of lending growth in EMs, not the level of total debt. Secondly, rapid credit growth has been concentrated in a small number of economies (see graph on right). There are already signs that lending is slowing in these markets.
“The final point to note is that while most attention tends to focus on the expansion of debt in dollar or local currency terms, it is just as important to pay attention to the prospects for GDP,” Capital Economics said. Rapid nominal GDP growth can prevent the credit ratio from ballooning despite a rapid expansion in debt.