Global debt grew most in the government and the non-financial corporate sector through the first half of 2016. Both sectors saw a rise in debt of $3.3trn (€2.9trn). The total debt-to-GDP ratio in developed markets has now reached 393%, which is almost twice as high a level of indebtedness as in emerging markets.
But the latter are playing catch-up. As you can see in the graph below, the rise in debt-to-GDP ratios is levelling off in the West, but is increasing rapidly in emerging markets. Even though government debt in EM countries are still small beer compared to their equivalents in the West, it is rising fast in a number of countries, such as Saudi Arabia, Brazil and China.
EM corporate debt surge
EM non-financial corporates have been accumulating debt at such a pace that companies in emerging markets are now more indebted than their developed market counterparts. While the DM non-financial corporate debt ratio has remained stable at just below 90% of GDP since 2009, its EM equivalent has risen steadily to reach 102% of GDP at the end of the second quarter of 2016.
2016 has so far been a record year for emerging market corporate as well as government debt issuance, with local currency bonds being the most popular way to raise funds. Because of investors’ increasing preference for short-duration bonds, a lot of debt will mature over the next three years. In 2017 alone, a staggering $975bn in non-financial corporate debt will have to be refinanced, according to the IIF. To put that into perspective: a similar amount of US high yield debt is coming due over the next four years.
Luckily for EM corporates, there is a healthy appetite for their debt at the moment. In the past six months, emerging market debt has been the most popular asset class with European investors, seeing €24.4bn in net inflows, according to Morningstar. And there is appetite for more: according to Expert Investor’s freshest investment sentiment data, a third of European fund buyers plan to increase their allocation to emerging market corporate debt over the next 12 months, while only 7% intend to decrease their exposure.
However, history has shown that optimism about emerging market debt can quickly dissipate. EM corporates will no doubt keep a nervous eye on the Fed over the coming months. Anticipating a rate hike, and ensuing dollar strength emanating from that, EM companies have understandably opted to issue local currency debt rather than dollar bonds this year.