Moody's: Rising emerging market debt increases risks; Asia leads debt growth globally

Emerging market economies are becoming increasingly vulnerable to external shocks after a decade-long build-up of debt, says Moody's Investors Service in a report. The growth in debt was the highest in the Asia Pacific region, with the largest increase in external borrowing in China, India, Indonesia, Taiwan and Malaysia. While China's external debt to GDP ratio is still the second-lowest globally at 13% of GDP in 2015, the average external debt to GDP ratio for Asia as a whole has recently increased from 31% in 2008 to 47% in 2015 -- well below the 78% of Emerging Europe, but comparable to the 48% in Latin America and the 43% in the Middles East and Africa region. 

Total emerging and frontier market external debt -- defined as debt owed by residents of a country to non-residents - has almost tripled from $3.0 trillion in 2005 to $8.2 trillion at the end of 2015. Debt is now growing faster than GDP and faster than foreign exchange reserves for many of these countries. 

The increase in debt is being driven by the growth in private debt, rather than public debt. Since 2005, private sector external debt has grown at an annual rate of 14.3% compared to 5.9% growth rate for public sector debt. 

Moody's expects that global economic growth will remain sluggish for the medium term and commodity prices will stay low for several years going forward. This will affect foreign exchange revenues and reserve accumulation for commodity exporters. The potential for capital flows to slow, should US interest rates continue to rise, would also exacerbate the debt situation in emerging economies. 

"Even though developments differ by country, these trends show that emerging and frontier markets are now more susceptible to economy-wide crises than they were a few years ago," said Elena Duggar, an Associate Managing Director at Moody's. "While sovereign debt profiles have improved, the increase in private sector debt is making sovereigns more vulnerable to contingent liabilities." 

The report analyses the growth in debt in 83 emerging and frontier market economies over the last decade, breaking down the data for four regions: Asia Pacific, Latin America and the Caribbean, Emerging Europe, and Middle East and Africa. 

Driven by growth in private debt in China, India and Indonesia, debt levels in the Asia Pacific region have grown at an average rate of 13.5% a year, according to the "The Evolution of Emerging Markets External Debt: Private Sector Debt Drives Broad-Based Build-Up of Emerging Markets External Vulnerability Risks." 

External debt in China has grown significantly over the last ten years. However, because it started from a low base, the amount of external debt relative to GDP in China was still the second-lowest globally at 13% at the end of 2015. The ratio has remained relatively flat over the last decade as the country's economy has expanded.