Leverage clock ticking over for major EM economies

Against the backdrop of generally weaker economic data for Asia and Latin America, and the on-going debate on Fed "lift-off", leverage is once again centre stage. Concerns are concentrated on the foreign currency denominated debt of non-financial corporations in emerging economies. Fear is that hedging is insufficient and notably for commodity producers. 

The latter point may even be adding to the commodities supply glut, as hard hit corporate are forced to produce more to meet debt obligations. Imagining a full blown crisis is not hard, stronger fundamentals than in previous crisis should help avert a new full blown EM crisis. The markets, at least for now, seem to agree. 

"We recognise the heightened downside risks, our expectation is that rather than deep crisis, a prolonged period of weaker growth awaits emerging economies, and not least China", says Societe Generale.

Analysis suggests that the major EM economies have shifted significantly since 2011 and are now entering the "leverage bubble bust" phase (India, China, Brazil) and some have even tipped into outright deleveraging (Chile, Russia). Encouragingly, the bulk of the advanced economies are today better placed.