The rapid rise in private-sector debt in emerging markets (EMs), particularly in foreign currency, has increased risks to their economies at a time of heightened global uncertainty, Fitch ratings said today.
Foreign-currency debt was highest as a share of GDP in Turkey at 41 per cent (including indexed debt) and Russia at 37 per cent. It was lowest in China at 10 per cent of GDP, and India at 17 per cent, it said.
Debt denominated in foreign currency is more risky than local-currency debt as exchange rate depreciation raises debt and debt-service ratios of sovereigns, households or corporates that lack foreign exchange incomes or assets, it added.
Foreign-currency debt, which is usually sourced from abroad, is typically more vulnerable to liquidity risk.
Fitch said high foreign-currency debt is a weakness for sovereign ratings.
“The share of EM government debt denominated in foreign currency (median for 76 Fitch-rated EMs) rose to 58 per cent at end-2015, from 50 per cent at end-2013, after falling from 64 per cent at end-2001,” it said.
The rating agency said it estimates that private debt could increase by about 8 per cent of GDP in Russia, 4 per cent in Brazil and South Africa, 2 per cent in Mexico and Turkey, and less than 1 per cent in China, India and Indonesia.
The report presents new estimates for non-financial private-sector foreign-currency debt in eight of the largest EMs: Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey.
It estimates that median foreign-currency debt of the eight countries’ private sector was 20 per cent of GDP at the second quarter of last year, out of total (local and foreign- currency) private sector debt of 90 per cent of GDP.
This broad definition of private-sector debt includes domestic bank credit to households and corporates, securities issued in the domestic and international markets, and other external debt of the corporate sector.