Rising indebtedness?
Emerging markets continue to have lower levels of debt than developed markets as a percentage of GDP. But as the chart below shows, from 2009 emerging markets have increased their levels of indebtedness to reach 183% of GDP according to latest available figures. What has driven this increase?
As is often the case, the answer is China. Strip it out and the level of indebtedness of emerging markets has barely budged for 20 years. This is a positive fundamental consideration for investors.
China's corporate debt is the main factor
Digging into the composition of emerging market debt unveils a similar insight: most of the increase has come from corporate debt in China. By contrast, public (sovereign) debt or household debt has remained fairly flat.
Should we be concerned?
The wave of Chinese corporate debt issuance over the past decade is observable in the chart below. The only market that has come close over this period is Turkey.
Is this a problem? Although the size of China's corporate debt sector has been noted as a source of systemic global risk by policymakers, we do not feel the bubble is likely to burst. Firstly, excess corporate debt aside, China's macroeconomic fundamentals are broadly in good health. We expect an orderly, managed corporate deleveraging over a period of years, which will admittedly weigh on overall growth. Second, much of the debt is issued by state-owned enterprises (SOEs), which are quasi-sovereign and can be considered as being bank-rolled by the Chinese goverment.
