Moody's: Rising emerging market debt increases risks; Middle East and Africa least vulnerable

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 Middle East and Africa region on average has the lowest external vulnerability. 

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. 

The Middle East and Africa region has the lowest external vulnerability among the four regions as measured by external debt to GDP and external debt to reserves. Nevertheless, both indicators have increased recently. 

External debt to GDP has risen to 43% in 2015 from 36% in 2011. Similarly, the average external debt to foreign exchange reserves ratio for the region has climbed to 258% in 2015 from 219% in 2011. 

The UAE and Qatar represent the largest shares of external debt in the region respectively, followed by South Africa where the debt-to-GDP ratio has grown over the decade.