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Business News/ Market / Mark-to-market/  The risks from increasing debt in emerging markets
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The risks from increasing debt in emerging markets

A slowdown in economic activity in EMs and the currency weakness against the US dollar together have pushed up the debt-to-GDP ratio in these regions

The proportion of bad loans held by large borrowers in India rose to 87.4% in September 2015 from 78.2% in March. Photo: MintPremium
The proportion of bad loans held by large borrowers in India rose to 87.4% in September 2015 from 78.2% in March. Photo: Mint

Emerging market (EM) debt continues to rise. A slowdown in economic activity in EMs and the currency weakness against the US dollar together have pushed up the debt-to-gross domestic product (GDP) ratio in these regions.

The December report of the Institute of International Finance (IIF) shows that non-financial corporate firms in China, Saudi Arabia and Turkey posted the highest rise in debt, with Brazil and Korea following. Saudi Arabia’s problem has been driven by the higher borrowing needs on oil price declines.

Last Wednesday, India’s central bank flagged off concerns on vulnerability of banks due to highly leveraged corporate balance sheets. In a sample of 2,711 publicly traded non-government, non-financial companies, 15.8% had weak balance sheets with interest coverage ratio (ICR) of less than one. This implies that servicing debt is a problem. The proportion of bad loans held by large borrowers in India rose to 87.4% in September 2015 from 78.2% in March.

IIF said the rise in indebtedness in the first half of 2015 (calendar year) was most pronounced in the non-financial corporate sector, growing by three percentage points to 89.5% of GDP. “Emerging market profitability is at multi-year lows, while firms continue to increase leverage," it added. The net debt burden for mining, materials and construction sectors across EMs has been rising since 2011.

It’s no wonder then that the December Bank of America-Merrill Lynch survey of fund managers mentions EM debt as one of the tail risks facing the global economy.

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Published: 28 Dec 2015, 12:35 AM IST
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