Global debt grew 318 percent in relation to GDP, to more than 318 percent in the first quarter of 2018, the first of such increase since the third quarter of 2016, according to theInstitute of International Finance (IIF), an industry association and data gatherer.
The IIF data flow also shows that emerging markets are becoming epicentres of worries as investor retreat from sector on strengthening dollar.
The IIF said the amount of debt in the world increased by almost $25 trillion in the year to the end of March and by more than $8 trillion in the first quarter of 2018
“The size and the pace of change raise fresh concerns over the dangers posed to a global financial system already struggling to deal with rising US interest rates, a stronger dollar, and widening risk premiums for borrowers alongside the worry that world growth is slowing,” it said, adding that for emerging markets, the dangers may be particularly acute.
The ultra-loose monetary policies pursued by the US Federal Reserve and others in the decade since the global financial crisis have pumped money into emerging assets on a gigantic scale, which is about reversing.
“You have to be very careful during periods of massive capital inflows,” Mohamed El-Erian, chief economic adviser to Allianz told Financial Times (FT).
“You risk planting the seeds of future crises…The big issue this [increase in debt] raises is the importance of emerging markets growing sustainably [to reduce the burden of debt].”
That levels of debt have continued to rise even after the Fed began to raise overnight rates last year and as global finance conditions have tightened “is, of course, a cause for concern”, said Hung Tran, the IIF’s executive managing director.
Many analysts argue that the world’s real debt problem is in mature economies, and that emerging economies are much better prepared than previously to deal with their relatively small debt loads.
EM government debt, particularly, seems manageable at the equivalent of 48 per cent of GDP on average, compared with 110 per cent in mature markets.
What is more, many EMs have improved their public finances and found other means of funding than relying on international lenders.
“Past crises have led to that,” said David Spegel of Fundamental Intelligence, Strategy and Analysis. “Many governments have realised that they can’t rely on the IMF [if things go wrong] and have developed alternative sources of funding.”
He pointed to Mexico as an example, where a local pension fund industry has emerged to provide an alternative to tapping international capital markets.
Yet Tran at the IIF said it would be wrong to focus on developed markets for signs of strain because debts there typically had longer maturities, so the stresses caused by rising interest rates could be managed over periods of several years.
Government debt in emerging markets gave more cause for concern, he said, partly because it had grown quickly, from about 35 percent of GDP a decade ago.
Corporate debt in emerging markets has grown even more quickly, from 63 percent of GDP a decade ago to more than 94 percent as at the weekend. That exceeds mature markets, where non-financial corporate debt had been stable at between 85 and 90 percent of GDP for the past decade, according to IIF data.
As emerging corporate debts have grown, market conditions have tightened. For both foreign currency and local currency EM bonds overall, the turnover on markets — or the ratio of trading volume to outstanding bonds — has declined.
Jim Barrineau, head of emerging market debt at Schroders, noted that a lot of the growth in emerging corporate debt had come from Asia, where there is a deep savings pool to provide a backstop.
“Nevertheless, it is troublesome,” he said. “We are seeing some issues with Brazilian companies, for example. They are not yet default candidates but if their currencies continue to fall the stresses will remain. It all depends on the dollar.”
The US dollar has strengthened sharply against other currencies from mid-April. And data from the IIF and from EPFR, which monitors flows into and out of mutual funds, shows a retreat from investors.
The IIF said foreign portfolio investors withdrew more than $14bn from EM bonds and equities in May and June. EPFR said that, this week, EM bond funds saw their first inflows for 12 weeks, although daily data suggested the outflows resumed after US President Doland Trump said he would put more tariffs on imports from China.
Unusually, such jitters appear to apply to EM only at present and not to other risky asset classes, such as US high yield corporate bonds. The latter are up, year-to-date, while EM corporate bonds, for example, have fallen sharply.
Barrineau said this suggested greater faith in growth in the US than in emerging markets, although he added: “The two are generally correlated, yet so far all the volatility has been in EM…at some point either US high yield will join EM or EM will heal.”
El-Erian said the discrepancy showed that US high yield and EM attracted a different set of investors — and that such “technicals” would be a driving factor behind the performance of EM assets in coming months.
“This is a technically unbalanced asset class,” he said. “The dedicated players are much smaller than the crossover players, and the capital allocated on the debt side is much more flighty than in other markets.” He said EM had experienced two out of three stages of a crisis this year: first, the reversal of flows; second, the contagion between currencies seen in the Argentina peso, Turkish lira and others.
“In the third,” he said, “either the strong names reassert with their fundamentals while the weak names succumb to their fragilities, which is what is happening now; or, you get one bad outcome leading to another.”
As to which of those outcomes will predominate, he said, the jury is still out.
Frontpage September 18, 2018
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