Moody's: Rising emerging market debt increases risks; Emerging Europe most vulnerable region

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. Emerging Europe is the most vulnerable of all regions, with six countries having an external debt-to-GDP ratio greater than 100%. 

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, the Middle East and Africa, and Emerging Europe. 

In Emerging Europe, the largest increase by far in dollar terms in external debt has been in Turkey. The country's external debt-to-GDP ratio rose to 55% in 2015 from 41% in 2005 and it now accounts for 19% of the total external debt in the region -- the second largest share after Russia. 

Still, Turkey's debt level remains moderate compared to other countries in the region. Ukraine, Hungary and Croatia are among the six countries in the region that have external debt-to-GDP levels that are higher than 100%. 

External debt in Russia has declined in the last two years due to the international embargoes following the military conflict with Ukraine, reducing its share of Emerging Europe's debt to 24% of the total.