Debt in the developing world has risen to an all-time high, adding to strains on a global economy flagging under the weight of rising trade protectionism and shifting supply chains.
Emerging economies had the highest-ever level of debt at the end of the first quarter, both in dollar terms and as a share of their gross domestic product, according to data released on Monday by the Institute of International Finance. The figures include the debts of companies and households.
The IIF said that lower borrowing costs thanks to central banks’ monetary easing had encouraged countries to take on new debt. In recent months the US Federal Reserve has changed its policy outlook and a string of emerging market central banks have cut interest rates; dollar-based funding costs have fallen in anticipation of the Fed’s next move.
“It’s almost Pavlovian,” said Sonja Gibbs, the IIF’s managing director for global policy initiatives. “Rates go down and borrowing goes up. Once they are built up, debts are hard to pay down without diverting funds from other goals, whether that’s productive investment by companies or government spending.”
The combined debts of 30 large emerging economies rose to 216.4 per cent of their GDP in March, from 212.4 per cent a year earlier, according to the IIF. In dollar terms, they rose to $69.1tn.
Ms Gibbs said that much of the risk in EM debt was concentrated in the corporate sector, where debts were equal to 92.6 per cent of GDP in March — higher than the comparable figure for the non-financial corporate sector in developed markets, according to the IIF.
While corporate debt in the developed world has kept pace with GDP growth in the past two decades, in EMs it has risen almost 50 per cent.
“There has been so much unfettered access to capital markets that it has changed the landscape over the past decade,” Ms Gibbs said. “Not just on the corporate side but in terms of the contingent liabilities on governments.”
She added: “This is not a group of borrowers with long experience of managing debt over economic cycles. Once you get into a downturn, a lot of firms have a lot of debts that they will have difficulty in paying.”
The biggest contributor to the rise in corporate debt has been China, where companies owed the equivalent of more than 155 per cent of GDP in March, or nearly $21tn, up from about 100 per cent of GDP, or $5tn, two decades ago.
David Spegel of Fundamental Intelligence, a bond market consultancy, noted that Chinese firms accounted for 42 per cent of all corporate bonds issued in EMs this year, which he said raised the risk of defaults next year and in 2021.