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The shadow of the debt

2/7/2019

Growth is slowing down whereas private debt has just levelled off. Is this something to worry about?

TRANSCRIPT // The shadow of the debt : February 2019

CHART OF THE MONTH

The economic slowdown that William De Vijlder just spoke about will also hit the emerging countries. We will look at debt in particular, the Achilles’ heel of the emerging economies.

François Doux

François Faure, hello.

François Faure

Hello.

François Doux

How is the debt situation in the emerging countries in early 2019?

François Faure

It all depends on whether China is included in the debt ratio. Including China, the debt ratio is much higher…

François Doux

That’s the blue curve.

François Faure

Exactly. And it has continued to rise throughout 2018. Excluding China, the debt ratio was more or less stable. Yet it is higher compared to the debt ratio just before the 2008-2009 financial crisis. This is why the IMF and other international financial institutions are saying that deleveraging did not occur.

François Doux

Let’s take a closer look. Which countries will face higher debt servicing?

François Faure

To measure the vulnerability of each country, we calculated the total amortization of bonds and syndicated loans as a share of foreign reserves. This chart shows the countries with the highest ratios. They can be divided into two groups. The first is comprised of countries with a rather strong macroeconomic situation and fundamentals. This is the case for South Korea, Mexico, Malaysia, and China. We are not really worried about these countries, despite relatively high ratios. The countries in the second group, in contrast, are much more fragile. They include Ukraine, South Africa, Turkey and Ghana, which have rather high ratios. Moreover, Ukraine’s debt burden has increased sharply over the past three years.

François Doux

To conclude, if a problem were to arise, could their heavier debt burden lead to a credit crisis?

François Faure

The answer is not really. ECB economists published a study recently. If we compare the current situation to the macroeconomic conditions that prevailed at the time of the big Asian financial crisis of the late 1990s, the probability of a crisis has only increased in very few countries, namely, Turkey, Ukraine and Argentina.

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