The corporate debt in emerging markets expanded from $4 trillion to more than $18 trillion last year. China accounts a majority of share in the total corporate debt of emerging markets.
The latest report released by the International Monetary Fund (IMF) noted that credit in emerging countries grew rapidly over the past decade. The credit portfolio of every country differs in composition— corporate, consumer and housing.
Historically, the Chinese market has been relatively isolated from international investors, but much is changing there now, making China virtually impossible for the diversified investor to ignore. Earlier this year, CNBC pointed to signs that Chinese regulators may start easing up on their scrutiny of companies after months of clamping down on tech firms. That Read More
For example, Brazil, Indonesia, and Turkey have the largest contribution of consumer credit to the expansion of debt in emerging markets. The corporate debt in China, Chile, and Singapore contributed to the credit expansion in the region.
According to the IMF, the rapid expansion of credit in emerging markets was due to economic growth, financial deepening, macroeconomic stability, and availability of new lending instruments over the past decade.
The emerging markets propelled the global growth in recent years. However, the international creditor warned emerging markets to prepare for a potential increase in corporate insolvency as firms with huge debts struggle due to rising borrowing costs and slowing growth.
The U.S. Federal Reserve is preparing to raise interest rates for the first in almost a decade, which could increase the borrowing costs worldwide. Companies are currently facing a mixture of problems as many of them accumulated debt in dollars. Companies would struggle to pay loans as the U.S. currency strengthens against the value of the local currency amid the plummeting prices of commodity– the main export for many emerging-market economies.
Emerging markets should prepare for corporate failures
Gaston Gellos, the head of global stability division of the IMF said it is important for authorities to be increasingly vigilant particularly on systemically important companies given the-the rapid expansion of credit.
“Monitoring vulnerable and systemically important firms as well as banks and other sectors closely linked to them is crucial,” said Gellos.
The IMF warned and advice emerging markets to prepare for the possibility of corporate failures. The international creditor said, “Where needed, insolvency regimes should be reformed to enable rapid resolution of both failed and salvageable firms.”
“Shocks to the corporate sector could quickly spill over to the financial sector “and generate a vicious cycle as banks curtail lending,” according to the IMF.
Net-capital outflows in emerging markets
Global investors sold approximately $40 billion worth of assets in the emerging markets in the third quarter, according to the estimate of the Institute of International Finance (IIF). The net-capital outflows were considered that worst since the latter part of 2008
The IIF represents approximately 500 of the largest banks, hedge funds and other financial firms around the world.
China’s recent stock market crash and slowing economy ignited concerns and reduced investors’ confidence in emerging markets. David Spika, global investment strategist at GuideStone Capital, told the Wall Street Journal, “Emerging markets are going to be a very difficult place to invest in for the next 12 to 24 months.”