New analysis by Source, one of the largest providers of Exchange Traded Funds (ETFs) in Europe, reveals the relatively low indebtedness of Emerging Market countries, with Russia and Indonesia among the ‘stars’ that have shrinking debt burdens financed domestically.
Of the world’s 20 largest economies, the 10 most indebted countries relative to their economic output in 2015, (including governments, non-financial sector corporates and households) were all developed, with Japan (396% of GDP), Netherlands (326%) and France (310%) the highest. South Korea (233%) and China (233%) – at 12th and 13th respectively – had the highest total debt among EMs, although their levels were still below the global average of 240% (See Table One below).
Paul Jackson, Head of Research at Source, commented: “The most striking feature of our analysis is the relative ‘lack’ of debt in emerging economies. Even China, which has been the focus of debt concerns in recent years, was less indebted than the global average in 2015. If investors are worried about debt in China they should really be worried about some other countries, in particular Japan, the Netherlands and France.
Based on their debt fundamentals, emerging markets are better placed than most developed markets, which make the yield premiums on their bonds even more attractive. Indeed, debt/GDP ratios in most emerging countries are well below global norms.”
A major differentiating factor is the ownership of the debt – that held domestically is less of a threat to an economy than if it is held by foreigners, Source says. Many emerging countries are self-financing and do not have the dangerous cocktail of growing debt financed externally. Among countries with low external debt/GDP ratios, Source would highlight Indonesia (34%) and Russia (39%), as they have also reduced their total debt/GDP ratio since 2000 (by 32% and 3% of GDP, respectively). Traditional “safe-havens” such as Germany (147%) and Switzerland (231%) have high external debt/GDP ratios but also have a lot of external assets (they are serial current account surplus countries) and their net international investment to GDP ratios are 48% and 92% respectively. Russia also has a positive NII/GDP ratio at 26%.
Paul Jackson added: “If we are searching for a so-called safe-haven, our analysis suggests Switzerland may be the best placed traditional candidate given that Germany suffers from its euro area associations. More controversially, Indonesia and Russia appear to have many desirable qualities but we doubt the market will recognise them anytime soon.”
Table One: Total Debt/GDP in 2015 (%) of world’s top 20 economies1
|Japan: 396%||Switzerland: 235%|
|Netherlands: 326%||South Korea: 233%|
|France: 310%||China: 233%|
|Spain: 301%||Germany: 183%|
|Canada: 295%||Brazil: 138%|
|Sweden: 293%||India: 120%|
|Italy: 290%||Turkey: 113%|
|UK: 270%||Russia: 84%|
|US: 246%||Mexico: 71%|
|Australia: 241%||Indonesia: 64%|
On the assumption that debt owed by governments is of a higher quality than that owed by corporates, Indonesia and Mexico are the best placed, with corporate debt amounting to less than 25% of GDP. India (48%), Russia (52%) and Turkey (54%) are not far behind. At the other end of the scale are Sweden (154%), the Netherlands (131%) and France (128%). Notably, China’s total debt was 233% of GDP in 2015, of which 156% was owed by the corporate sector. In Japan, however, “only” 102% of the 396% total was owed by the corporate sector.
Source UK Services Limited is authorised and regulated by the Financial Conduct Authority in the UK.
1Source: BIS, IMF, OECD, Oxford Economics, Datastream and Source Research