BackEmerging economies become vulnerable as external debt rises: Moody’s
Moody's says growing at a fast clip of 10.6% a year, the external debt of emerging economies has tripled over the last decade to $8.2 billion in 2015
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Mumbai: The debt binge of emerging market economies over the last decade could pose a systemic risk to some of them, due to sluggish economic growth, normalisation of US interest rates and depressed global commodity prices, according to Moody’s Investor Services.
Growing at a fast clip of 10.6% a year, the external debt of emerging economies has tripled over the last decade to $8.2 billion in 2015, said the global rating agency in a report on Thursday.
Moody’s studied 83 emerging countries that included 17 Asian economies, 19 Latin American and Caribbean countries 26 countries in the Middle East and the rest from Emerging Europe.
The growth in external debt was faster than the growth in the gross domestic product (GDP) and foreign exchange reserves of these economies, the report said.
“As a result, the average emerging markets external debt to GDP ratio increased from its decade-low of 40% in 2008 to 54% in 2015, and the average external debt to reserves ratio rose from 251% in 2007 to 353% in 2015," said the report.
Within the emerging economies bunch, Asian countries led the growth in external debt, with China the biggest borrower. “The Asia Pacific region’s increase in debt—of $1.4 trillion over the last five years— represents almost 60% of the total increase in EM debt over that period," the report said.
Consequently, the vulnerability metrics of the region have deteriorated the most given the slowdown in capital flows, the end of the rising commodity price cycle and slowing domestic economic growth.
Within Asia, the rise in the stock of the external debt of India was the second largest after that of China, the report said. At $474 billion, India’s external debt forms 16% of the total stock in Asia Pacific region while China forms the lion’s share at 47%.
India’s external debt stock is mainly from private companies and according to the Reserve Bank of India’s latest report on foreign exchange reserves, the ratio of short-term debt to forex reserves was 23.1% as of September 2015, down from 24.2% a year ago, an RBI report dated 20 June said.
However, India is less vulnerable than most of its emerging market peers as forex reserves have risen to a record high over the last three years while external debt has risen at a slower rate.
Forex reserves stood at $361.94 billion as of 8 July, marginally down from the record high of $363.4 hit in June. Also, external debt as a percentage of GDP at 23% is the lowest for India globally, said the Moody’s report.
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