JPMorgan’s analysis suggests that the debt burdens of emerging market companies and households have jumped from 73 per cent of GDP in 2007 to 106 per cent at the end of 2014, virtually as high as in the developed world, where private sector debt levels have been falling (see the first chart).
“In previous research, the IMF found that an increase in the ratio of credit to GDP of five percentage points or more in a single year signals a heightened risk of an eventual financial crisis,” says Joseph Lupton, senior global economist at JPMorgan.
“Nearly half [of the EM countries analysed] have registered sustained increases at close to this amount over the entire period.”
Moreover, although the figures include domestic bank credit, cross-border loans extended to the non-bank private sector and debt securities issued by non-financial companies, it does not include shadow banking, due to a lack of data in many countries.
As a result, JPMorgan estimates that it is understating total private credit by around 10 per cent.
“After seven years of a credit binge fuelled by easy money from the Fed the tide is going out and what’s going to be left to see is the quality of assets that have been bought over this period. There are going to be plenty of assets that are not going to be able to weather the Fed rate-hiking process.”
Mr Lupton admits to being downbeat on the global economy as a whole, given that emerging markets now account for around 40 per cent of GDP, around twice the level during the 1997-98 EM crises, meaning a slowdown will have a greater effect on the world at large.
The problem is most acute in Asia. Hong Kong, at 293.2 per cent, and Singapore, 178.9 per cent, have the highest ratios of private non-financial credit to GDP, although their status as regional financial centres, with a concentration of banking and capital markets activity, may skew the figures somewhat.
But even apart from this duo, the highest ratios are found in Asian countries such as Malaysia (170.7 per cent), South Korea (167.2 per cent), mainland China (147.1 per cent) and Thailand (134.4 per cent), as the second chart shows.
Hong Kong and Singapore have also seen the largest rises in their private non-financial credit to GDP ratios since the end of 2007, with Hong Kong’s level rising by 110.5 percentage points (to $868bn) and Singapore’s by 63.3 points (to $541bn).
Aside from these two, mainland China stands out. It has seen the largest rise in debt levels since 2007, of 42.7 percentage points, and has by far and away the largest stock of private non-financial sector debt in dollar terms, some $14.97tn, more than half of the $26.38tn of such debt in the 20 EM countries analysed by JPMorgan.
The next largest stocks of debt were found in South Korea ($2.3tn), Brazil ($1.61tn) and India ($1.2tn).
Turkey, Thailand and Brazil have also seen rises of more than 30 percentage points in their debt ratio since the global financial crisis, figures Mr Lupton describes as “very big”.
Hungary, South Africa and Argentina were the only three of the 20 countries to see a fall in this measure. Argentina has the lowest ratio overall (15.4 per cent of GDP), followed by Mexico and Indonesia.
However, JPMorgan’s analysis suggests only around 8 per cent of the debt is foreign currency-denominated, lessening fears over rising repayments as emerging market currencies continue to weaken against the dollar.
In China, this figure is only around 2 per cent, although this still equates to about $300bn of debt.
The highest proportions of foreign currency-denominated private debt are believed to be in Mexico (47 per cent), Hungary (43 per cent), Singapore (40 per cent), Turkey (27 per cent) and Brazil (23 per cent).
JPMorgan’s central forecast is that the Federal Reserve will raise rates by 175 basis points by the end of 2016, almost double market expectations of around 100bp.
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