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22011

Emerging market countries enjoy relatively low indebtedness

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ETF provider Source has conducted new analysis that shows  the relatively low indebtedness of emerging market (EM) countries, with Russia and Indonesia among the ‘stars’ that have shrinking debt burdens financed domestically. 

The research found that of the world’s 20 largest economies, the ten most indebted countries relative to their economic output in 2015, (including governments, non-financial sector corporates and households) were all developed, with Japan (396 per cent of GDP), Netherlands (326 per cent) and France (310 per cent) the highest.
 
South Korea (233 per cent) and China (233 per cent) – at 12th and 13th respectively – had the highest total debt among EMs, although their levels were still below the global average of 240 per cent.
 
Paul Jackson, (pictured) Head of Research at Source, says: “The most striking feature of our analysis is the relative ‘lack’ of debt in emerging economies. Even China, which has been the focus of debt concerns in recent years, was less indebted than the global average in 2015. If investors are worried about debt in China they should really be worried about some other countries, in particular Japan, the Netherlands and France.
 
“Based on their debt fundamentals, emerging markets are better placed than most developed markets, which make the yield premiums on their bonds even more attractive. Indeed, debt/GDP ratios in most emerging countries are well below global norms.”
 
Source found that a major differentiating factor is the ownership of the debt – that held domestically is less of a threat to an economy than if it is held by foreigners.
 
The firm writes that many emerging countries are self-financing and do not have the dangerous cocktail of growing debt financed externally. Among countries with low external debt/GDP ratios, Source would highlight Indonesia (34 per cent) and Russia (39 per cent), as they have also reduced their total debt/GDP ratio since 2000 (by 32 per cent and 3 per cent of GDP, respectively). 
 
Traditional ‘safe-havens’ such as Germany (147 per cent) and Switzerland (231 per cent) have high external debt/GDP ratios but also have a lot of external assets (they are serial current account surplus countries) and their net international investment to GDP ratios are 48 per cent and 92 per cent respectively. Russia also has a positive NII/GDP ratio at 26 per cent.
 
Paul Jackson adds: “If we are searching for a so-called safe-haven, our analysis suggests Switzerland may be the best placed traditional candidate given that Germany suffers from its euro area associations. More controversially, Indonesia and Russia appear to have many desirable qualities but we doubt the market will recognise them anytime soon.”
 
On the assumption that debt owed by governments is of a higher quality than that owed by corporates, Indonesia and Mexico are the best placed, with corporate debt amounting to less than 25 per cent of GDP. India (48 per cent), Russia (52 per cent) and Turkey (54 per cent) are not far behind. At the other end of the scale are Sweden (154 per cent), the Netherlands (131 per cent) and France (128 per cent). Notably, China’s total debt was 233 per cent of GDP in 2015, of which 156 per cent was owed by the corporate sector. In Japan, however, just 102 per cent of the 396 per cent total was owed by the corporate sector.

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