Growing vulnerabilities in major emerging economies

Financial investors are becoming more concerned about the growing vulnerabilities in major emerging economies, particularly China, as they reassess the global growth outlook, according to a report by the Bank of International Settlements.

Global financial markets have been extremely volatile over the past few months, mainly due to events in China. The quarterly review said: “The Chinese authorities’ decision in August to allow the renminbi to depreciate against the dollar gave markets a renewed jolt. The move intensified investors’ concerns about growth prospects for China, emerging market economies more broadly and, ultimately, the global economy,”

According to the BIS, recent capital outflows from China and market volatility may be warnings signs of higher borrowing costs down the line.

“We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines,” said Claudio Borio, the bank’s chief economist.

The report pointed out how China’s economic slowdown and the US dollar’s appreciation both pose a challenge to EMEs. “Growth prospects have weakened, especially for commodity exporters, and the burden of dollar-denominated debt has risen in local currency terms.”

The Burden of Debt

The BIS said that total debt ratios have increased to levels that are much higher than they were at the peak of the last credit cycle eight years ago (just before the global financial crisis).

Since then in developed countries the combined public and private debt has soared to 265% of GDP – a 36 percentage point increase.

In addition, emerging economies are piling on more debt too. Total debt in emerging markets increased 50 percentage points to 167%, with China at 235%.

Off-shore borrowing in US dollars outside the United States reached $9.6 trillion, while financing of non-banks in euros outside the euro area came to $2.8 trillion.