Emerging markets are increasingly becoming vulnerable to global shocks after a decade-long build-up of debt, with the Asia Pacific region, including India, seeing the largest growth in external borrowings, says a report by Moody’s.
Among the larger nations, India added up the second largest pile of external debt between 2010 and 2015, says the report. “The country had USD 474 billion in external debt as of 2015, representing 16 per cent of the Asia Pacific region’s total debt,” it said.
But the report added that the country’s external debt has grown two to three times slower than China’s, at a five-year annual average rate of 8.4 per cent.
Additionally, the country’s external debt to GDP ratio has risen from 17 per cent in 2005 to 23 per cent in 2015, Moody’s said, adding that it is still one of the lowest globally.
Debt pile up is the highest in the Asia Pacific region, with the largest increase in external borrowings seen in China, India, Indonesia, Taiwan and Malaysia.
“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 per cent a year,” says Moody’s.
Asia Pacific debt rose to USD 1.4 trillion over the last five years and represents almost 60 per cent of the total rise in EM debt over that period. In 2014, the region’s debt outstanding surpassed that of emerging Europe.
It notes that emerging market economies are becoming “increasingly vulnerable to external shocks after a decade-long build-up of debt”.
As per Moody’s estimates, global economic growth would remain sluggish for the medium term, while commodity prices would stay low for several years going forward. “This will affect foreign exchange revenues and reserve accumulation for commodity exporters,” it said.
It also observed that capital flows can slow if US interest rates continue to rise, which 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,” Moody’s Associate Managing Director Elena Duggar said.
“While sovereign debt profiles have improved, the increase in private sector debt is making sovereigns more vulnerable to contingent liabilities,” Duggar added.
The data show that the average external debt to GDP ratio for Asia as a whole has increased from 31 per cent in 2008 to 47 per cent in 2015 — well below the 78 per cent of emerging Europe, but comparable to the 48 per cent in Latin America and 43 per cent in the Middle East and African region.
Looking at China, Moody’s says its external debt to GDP ratio was still the second-lowest globally at 13 per cent of GDP in 2015.