Emerging

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EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
Editorial  
Debt, a still debated issue  
In emerging and developing countries, debt has become a recurrent theme that pops up whenever financial conditions tighten and/or  
economic activity slows. The IMF recently published a blog post on the subject with a rather alarming title. Granted, the combined  
impact of several factors, namely the downward revision of growth forecasts, a stronger dollar and the normalisation/tightening of  
monetary policies that have been rather accommodating until now, will increase the weight of the debt burden. Yet not very many  
countries are at high risk of debt distress, and there is little probability that debt will trigger a systemic credit crisis, even though the  
risk has increased for the most vulnerable countries.  
Debt in emerging and developing countries has become a recurrent  
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- Debt in the main emerging countries (% GDP)  
theme that pops up whenever financial conditions tighten and/or  
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economic activity slows, as is currently the case . The major  
Non-bank private sector ▪▪▪ Excluding China & Hong-Kong  
General government ▪▪▪ Excluding China & Hong-Kong  
international financial institutions continue to revise downwards their  
growth forecasts.  
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The slowdown has been confirmed  
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Compared to its June 2018 outlook, the World Bank lowered its  
growth forecasts for emerging and developing countries as a whole  
by 0.6 percentage points in 2019 (to 4.2% from 4.8%) and by 0.2 pp  
in 2020 (to 4.5% from 4.7%). The IMF also revised its 2019 forecast,  
for the second time, to 4.5%, from 5.1% in June 2018 (which is  
equivalent to the World Bank’s downward revision). In 2020, in  
contrast, the IMF expects growth to rebound a little more strongly  
than the World Bank, to 4.9%.  
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80  
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The rather small downward revision of Chinese growth since the  
mid-2018 outlook (-0.2 pp for the IMF, -0.1 pp for the World Bank)  
explains only about 10-15% of the revision for the emerging and  
developing countries as a whole (Chinese GDP accounts for about  
2006  
2008  
2010  
2012  
2014  
2016  
2018  
Source: BIS  
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0% of the GDP of the emerging and developing countries). The  
remaining 85-90% can be attributed to the spill-over effects of the  
Chinese slowdown on the countries of Asia, as well as the painful  
recovery of the Russian economy despite the upturn in oil prices  
countries whose currencies have come under tense pressure,  
during summer 2018 like Argentina and Turkey).  
Private debt is higher, but sustainable  
(
see below). We must also factor in the severe slowdowns in South  
Africa and Mexico, and the recessions in Argentina, Iran, Turkey  
and Venezuela.  
The combined impact of these two factors will increase the weight of  
the debt burden in the emerging and developing countries.  
According to the IMF and the Institute of International Finance (IIF),  
the private non-financial sector in the emerging and developing  
countries has not deleveraged since the 2008-2009 crisis. This is  
true but only at the aggregate level as China alone explains the  
ongoing increase in the private sector debt/GDP ratio in recent  
years. Excluding China, the ratio has been fairly stable since 2016  
The downward revision of growth estimates for emerging and  
developing countries as a whole is based mainly on survey data and  
the usual cyclical indicators (industrial production, exports, and retail  
sales) which have levelled off or deteriorated since mid-2018. From  
a more fundamental perspective, these revisions are justified by 1)  
the slowdown in world trade in 2019, by 0.6 pp compared to the  
mid-2018 forecasts (for both the IMF and the World Bank), and 2)  
the tightening of financial conditions, both external (rise in risk  
premiums, currency depreciation against the USD) and internal  
(
chart 1). Yet even excluding China, private debt is significantly  
higher than it was before the 2008-2009 crisis (82% of GDP in Q3  
018 vs 64% at year-end 2007). An aggravating factor is that  
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foreign currency debt has increased sharply in recent years,  
especially excluding China. According to the IIF, in the emerging  
countries excluding China, foreign currency debt in the non-bank  
sector (including sovereign debt in foreign currencies) has swelled  
from 14% to 20% of GDP since 2015, and it is currently higher than  
the previous peak at the end of the 1990s, prior to the Asian  
financial crisis.  
(
normalisation or tightening of monetary policies, notably for the  
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The IMF recently published a blog post by Martin Muhselsein and Mark  
Flanagan with a rather alarming title: Three steps to avert a debt crisis.  
Drawing on the IMF database covering 190 countries, the authors focus on  
emerging market debt. The IIF did the same in its latest update of the Global  
Debt Monitor entitled “Devils in the details”. Lastly, in the World Bank’s latest  
edition of Global Economic Prospects released in January, a chapter is devoted  
to debt in low-income countries (“Debt in low-income countries: Evolution,  
Implications and Remedies”).  
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EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
Debt raises at least two questions. Which countries will face a sharp  
increase in market debt servicing in the years ahead? Could the  
increased debt burden trigger a credit crisis?  
By comparing a few basic macroeconomic variables for a selection  
of 20 emerging countries before the Asian crisis of 1997-1998 with  
today’s figures, the authors only identified three countries that now  
have a significantly higher probability of experiencing a banking  
crisis. Unsurprisingly, the three countries are those with the highest  
external vulnerability: Argentina, Turkey and Ukraine. Argentina and  
Ukraine benefit from IMF programmes, which for the moment are  
providing financial stability (sustainable in Ukraine’s case, which has  
been in the programme since 2014). In Turkey’s case, the  
consolidation of public finances and the banking sector in the 2000s  
have enabled the economy to absorb a series of financial shocks,  
including the recent increase in the cost of credit risk for banks.  
The answer to the first question is that few countries are at high risk  
of debt distress, even though the aggregate amount of maturing  
bond debt and syndicated loans is rising year after year; according  
to the IIF, the annual redemption will average USD 1,949 bn in  
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019-2020 (with a peak of USD 2,16 bn this year) compared to a  
017-2018 average of USD 1,639 bn. At the country level, however,  
if we compare repayments to official foreign reserves at year-end  
018, Ukraine is the only country that stands out for a high and  
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rapidly rising debt ratio (chart 2). Among the countries with a high  
debt ratio, we must distinguish between those in healthy  
macroeconomic situations (China, South Korea, Malaysia) and the  
more vulnerable countries (South Africa, Turkey and especially  
Ghana), which must be monitored. On the whole, however, the  
emerging and developing countries are not backed up against a wall  
of maturing market debt, at least not in the short term.  
The response to the second question was recently provided by the  
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economists at the European Central Bank (ECB) . Like most recent  
academic research on the vulnerability of the emerging countries,  
they conclude that there is much less risk that a financial shock will  
trigger a balance of payments crisis or systemic credit crisis than in  
the past. The vast majority of emerging countries are better armed  
to cope: adequate external solvency and liquidity, flexible forex  
regimes, credible monetary policies, and no major mismatches in  
banks’ balance sheets.  
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- EM bond debt and syndicated loans amortization  
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(% official fx reserves )  
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0
0
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0
0
0
0
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017-2018  
019-2021  
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1) Sovereign net foreign assets for the United Arab Emirates  
AE : United Arab Emirates, AR : Argentina, BR : Brazil, CZ : Czech Rep, CL : Chile, CO : Colombia,  
CN : China, EG : Egypt, GH : Ghana, HU : Hungary, IL : Israël, ID : Indonesia, IN : India, KE :  
Kenya, KR : South Korea, MX : Mexico, MY : Malaysia, NG : Nigeria, PH : Philippines, PL : Poland,  
RU : Russia, SA : Saudi Arabia, TH : Thailand, TR : Turkey, UA : Ukraine, ZA : South Africa.  
Source: IIF - BNP Paribas  
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Livia Chitu and Dominic Quint, Emerging market vulnerabilities a comparison  
with previous crises, ECB Economic Bulletin  December 2018  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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