As reported by atradius, corporate bonds in emerging countries have risen rapidly and with them the debt of households, non-financial corporations and governments (233% of GDP in 2015 from 212% in 2008 before the outbreak of the financial crisis). However, the debt-to-GDP ratio of emerging market economies (EMEs) appears to have increased at a greater speed and volume than advanced ones. This sudden accumulation of debt has relieved concerns about the solvency of local businesses in an environment of global trade slowdown, low commodity prices, declining profitability, currency depreciation and normalization of US interest rates. And even if currently no systemic distribution of risks is envisagedAs firms' absorptive capacity is much stronger than in previous periods of turbulence in global markets, risks have increased at the microeconomic level, depending on the sector and country in which business is done.
Firms in emerging countries, especially in the mining, energy, construction and real estate sectors have significantly increased their debt in the period of maximum implementation of expansionary monetary policies following the global financial crisis. Debt surpassed $24 trillion (from $15 trillion in 2008) in Q2015 XNUMX. In EMEs the average debt-to-GDP ratio widened from 40 percentage points to over 100%, while the average ratio stands at 86% for advanced economies, raising concerns from the IMF and BIS. In particular, most of this increase is due to developments in China (and Hong Kong, as part of Greater China): excluding these markets, the increase in corporate debt is more modest, equal to 12% of GDP, or around 53%. However, this hides important differences between countries. The increase was most pronounced in Türkiye, Brazil, Russia and MalaysiaFurthermore, in Brazil and Russia, the recent increase in the debt-to-GDP ratio also reflects a contracting economy, further increasing the level of credit risk.
In this context, companies in Turkey appear to be the most vulnerable, followed by Brazil, Indonesia and India: the refinancing risk weighs above all. To a lesser extent, this is also the case for firms in Russia, South Africa and Mexico, partly mitigated by official reserves. These same countries recently experienced a sizeable depreciation of their currencies in May 2013, when markets suddenly started gearing up for the end of the US ultra-loose monetary policy period.
Generally, external financing is the least secure funding source, as it exposes the borrower to external shocks and sudden stops in capital flows. Also, foreign currency loans are riskier than local currency loans, since involve currency risks, amplifying the vulnerabilities of a change in market expectations. In turn, bonds are particularly sensitive, as securities are tradable unlike bank loans. And short-term financing is even riskier than long-term financing, as it increases interest rate vulnerability. The more vulnerable they arefinally those companies with high leverage (debt/equity ratio), especially those that have resorted to financing in foreign currencies and at shorter maturities.
