Emerging market debt triples since 2005, posing threat, Moody’s says

Monday, 25 July 2016 00:00 - - {{hitsCtrl.values.hits}}

LONDON (Reuters) - Developing countries have nearly tripled their external debt over the past decade, outpacing economic growth and increases in foreign exchange reserves - which could leave them open in the future to a “systemic crisis”, ratings agency Moody’s said on Thursday.

Emerging market governments and companies around the globe have rushed in recent years to take advantage of rock-bottom global borrowing costs and investor hunger for yield.

As a result, external debt jumped to $8.2 trillion in 2015 from $3.0 trillion in 2005, the Moody’s report found, thanks largely to private-sector borrowing. The average ratio of external debt to gross domestic product jumped to 54% in 2015 from a decade-low of 40% in 2008.

“External vulnerability has increased significantly in about 75% of emerging economies globally,” the authors of the report wrote.

The average ratio of external debt to reserves soared to more than 350% last year from just over 250% in 2007, the report added.

The increase in debt had been largely driven by borrowing from the private sector, which has seen external debt grow 14.3% annually since 2005, compared with a 5.9% increase in public-sector debt in the same period, Moody’s said.

Private-sector debt made up nearly 70% of external debt last year compared with 51% a decade earlier, the study found, looking at 83 countries classified as emerging and the riskier sub-set of frontier markets.

While ratios had generally increased across all regions, not all of them were equally affected. Emerging Europe remained the most vulnerable region, followed by Latin America, the Caribbean and Asia Pacific. The Middle East and Africa had on average has the lowest, Moody’s found.

Emerging markets overall were still less susceptible to debt crises than they were in the early 2000s, Moody’s said, noting the benefits of flexible exchange rates and healthier sovereign balance sheets.

But it added: “Economic growth will remain sluggish for the medium term. We expect commodity prices to remain low for several years going forward, which will affect foreign exchange revenues and reserve accumulation in commodity exporters.”

Higher U.S. interest rates, slowing capital flows and tighter liquidity could all lead to shorter debt maturities and a rise in the proportion of short-term debt, Moody’s said.

“All of these forces will lead to continued deterioration in external vulnerability metrics, and if prolonged, eventually to increased systemic crisis susceptibility,” the report said.