The “emerging market” classification has been redundant for some time now
The key chart
Trends in market share (%) of global debt since June 2009 (Source: BIS; CMMP)
The key message
Whisper it softly; the “emerging market” (EM) classification has been redundant for some time now.
CMMP analysis has questioned the relevance and usefulness of the “emerging market” classification for some time. The latest BIS data release, merely supports this view, at least from a debt perspective.
EM’s share of global debt has increased from 18% in June 2009 (at the time of the GFC) to 40% in June 2023 – a remarkable structural shift (see key chart above).
Over this period the EM debt ratio has risen from 97% GDP to 156% GDP, and is now only 6ppt below the debt ratio of so-called “advanced” of “developed markets” (DM).
For reference, the DM debt ratio has fallen from 174% GDP at the beginning of this period and from its all-time high of 183% GDP in 4Q20.
These dynamics have supported a popular investment narrative called, “The EM-debt story”.
In my previous post, however, I noted that all sectors of the Chinese economy are increasing their levels of indebtedness and that all their debt ratios hit new highs in 2Q23 (see “Whisper it softly – Part III“).
The key point here is that if we strip out China, EM’s shares of global debt has only increased slightly since the GFC, from 10% to 13%.
What this means is that rather than witnessing an EM-debt story, we have, in fact, been witnessing “The China-debt story” since the GFC.
So what?
While the EM classification remains convenient, it is increasingly less relevant and/or helpful in terms of understanding the impact of global debt dynamics on macro policy, investment decisions and financial stability.
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.
Trends in EM private sector debt ($bn) and debt ratio (% GDP) since the GFC (Source: BIS; CMMP)
The key message
In this fifth post in my “Global Debt Dynamics” series, I consider the hypothesis that the “EM-debt” story has been replaced by the “China-debt” story.
At its simplest, the EM-debt story refers to the sharp increase in the EM share of global private sector credit (PSC) and the narrowing of the gap between the aggregate PSC debt ratios for advanced (DM) and emerging (EM) economies since the global financial crisis (GFC).
The EM share of global PSC has increased sharply from 16% in 2Q08 to 38% in 2Q21. Over the same period, the gap between the PS debt ratios has narrowed from 86ppt to only 8ppt. This represents a remarkable structural shift from DM to EM economies.
Strip out China, however, and the EM share of global PSC is largely unchanged since the GFC. China has accounted for 20ppt of the 22ppt increase in market share described above and currently accounts for almost 70% of total EM PSC alone. For added perspective, China’s outstanding stock of PSC ($37tr) is c.10x and c.14x the outstanding stock in Korea and India respectively, the second and third largest EM PSC markets. Viewed from the narrow perspective of relative size and growth, there is some support for the hypothesis that the China debt story has replaced the EM debt story, or at least overtaken it.
There are two problems with this conclusion however: (1) it relies on an overly narrow view of global debt dynamics; and (2) in truth, there is no such thing as an EM debt story in the first place.
The EM universe includes a group of over 20 economies with very heterogeneous debt dynamics in terms of the level of indebtedness, the rate of excess credit growth and affordability of debt:
For most EM economies, the “potential-growth” story remains in both the NFC and HH sectors
Some of the fastest rates of excess credit growth are occuring in EM economies that already exhibit relatively high levels of indebtedness
Elevated affordability risks in a number of EM economies is of concern given the expected future direction of global rates
While the EM classification remains convenient, it is increasingly less relevant in terms of understanding the impact of debt dynamics on macro policy, investment decisions and financial stability.
Replace the EM debt story with individual EM country debt stories not just the China version.
EM debt dynamics
At its simplest, the so-called, “EM-debt” story refers to the sharp increase in EM’s share of global PSC and the rapid narrowing in the gap between the average PSC debt ratios in advanced (DM) and EM economies since the Global Financial Crisis (GFC).
Trends in private sector debt ($tr) and debt ratio (% GDP) since the GFC (Source: BIS; CMMP)
The outstanding stock of EM PSC has grown from $14tr in 2Q08 to $54tr in 2Q21, a nominal CAGR of 11.5% (see graph above). Over the same period, the outstanding stock of DM PSC has risen from $71tr to $87tr, a nominal CAGR of only 1.5%.
Breakdown of global PSC (% total) since the GFC (Source: BIS; CMMP)
The EM share of global PSC has increased sharply from 16% in 2Q08 to 38% in 2Q21, while the DM share of global debt has fallen from 84% to 62% (see chart above). As discussed in “Global Debt Dynamics –II”, this structural shift from DM to EM is one of the two key structural changes that have taken place in the global PSC market since the GFC (the other being the shift away from HH to NFC debt).
Trends in PSC debt ratios (% GDP) since the GFC (Source: BIS; CMMP)
The gap between the average DM and EM PSC debt ratio (debt % GDP) has also narrowed sharply since the GFC. At the end of 2Q08 the respective PSC debt ratios were 172% GDP and 86% GDP, a gap of 86ppt. At the end of 2Q21, the respective PSC debt ratios were 175% GDP and 167% GDP, a gap of only 8ppt (see chart above).
Trends in share of global PSC since GFC (Source: BIS; CMMP)
Strip out China, however, and the EM share of global PSC is largely unchanged since the GFC (see green line in chart above). China has accounted for 20ppt of the 22ppt increase in the increase in market share described above. As result, China’ share of EM PSC has risen from 36% to 68% over the period (and from 6% to 26% of global PSC).
China’s share of EM debt by category of debt (Source: BIS; CMMP)
China accounts for 64%, 68%, 71% and 61% of total, PSC, NFC and HH debt in EM respectively (see chart above). China’s outstanding stock of PSC ($37tr) is c.10x and c.14x the outstanding stock in Korea and India respectively, the second and third largest EM PSC markets (see chart below).
Relative size of PSC in largest EM PSC markets (Source: BIS; CMMP)
So in terms of relative growth, outstanding stock and relative size there are grounds for accepting the hypothesis that the EM story has been replaced by the China debt story. However, a key theme of CMMP analysis is that debt dynamics are not simply about the size/level of outstanding debt. There are other “chapters” to EM debt story including the levels of indebtedness, the growth rate in debt and the affordability of debt, for example.
EM HH debt ratios plotted against NFC debt ratios (Source: BIS; CMMP)
For most EM economies (as classified by the BIS) the potential “EM-growth” story remains. NFC and HH debt ratios in 16 EM economies remains below the 90% GDP and 85% GDP maximum threshold levels identified by the BIS (see chart above), for example. In contrast, elevated debt levels exist in both sectors in Hong Kong and Korea and in the NFC sector in China, Singapore and Chile.
NFC RGF plotted against NFC debt ratio (Source: BIS; CMMP)
As in DM, some of the fastest rates of excess credit growth are occurring in EM economies that already exhibit relatively high levels of indebtedness (for an explanation of the methodology, see here). In the NFC sector, for example, relatively high levels of excess credit growth have occurred in Hong Kong, Singapore, Korea, Chile and Saudi Arabia (see chart above). Similarly, relative high levels of excess HH credit growth have occurred in relatively indebted HH sectors in Korea, Hong Kong, Thailand, Malaysia and China (see graph below).
HH RGF plotted against HH debt ratio (Source: BIS; CMMP)
Elevated affordability risks in a number of EM economies is of concern given the likely future direction of global rates. Private sector debt ratios are not only high in absolute terms, but they are also above respective LT averages in Hong Kong, Turkey, China, and Brazil. Note in contrast the relatively low levels of affordability risk in CEE, Russia and India (see chart below).
Global DSR (x-axis) and deviations from LT averages (y-axis) (Source: BIS; CMMP)
Conclusion
In truth, there is no such thing as an EM debt story. The EM universe includes a group of economies with very heterogeneous debt dynamics. My financial stability heatmap summarising the debt dynamics of the 10 EM economies that account for over 90% of total EM PSC illustrated this clearly (see below).
Financial stability heatmap – top 10 EM economies (Source: CMMP)
So while the EM classification remains convenient, it is increasingly less relevant in terms of understanding the impact of debt dynamics on macro policy, investment decisions and financial stability.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Are the risks associated with excess growth re-emerging? Excess credit growth versus penetration rates (Source: BIS; CMMP)
The key message
Risks associated with “excess credit growth”, which had been declining in the pre-Covid period, have re-emerged during the pandemic.
Some of the highest rates of excess credit growth are currently occurring in economies where debt levels exceed maximum threshold levels (Singapore, France, Hong Kong, South Korea, Japan, Canada).
Affordability risks are also increasing within and outside (Sweden, Switzerland, Norway) this sub-set despite the low interest rate environment.
Risks are more elevated in the corporate (NFC) sector than in the household (HH) sector but are not unique to either the developed market (DM) or emerging market (EM) worlds – one more reason to question the relevance of the current DM v EM distinction
Much of the debate relating to global debt focuses exclusively on the level of debt and, to a lesser extent, on the debt ratio (debt as a percentage of GDP). This analysis highlights how the addition of growth and affordability factors provides a more complete picture of the risks associated with current trends and their investment implications.
Introduction
As noted above, much of the recent debate about global debt has been restricted to its level in absolute terms or as a percentage of GDP. The addition of other factors – the rate of growth in debt, its affordability and, in the case of many EMs, its structure – provides a more complete picture, however.
In this post, I add condsideration of the rate of growth in global debt to my previous analysis in “D…E…B…T, Part II.” The approach is based on the simple relative growth factor (RGF) concept which I have used since the early 1990s as a first step in analysing the sustainability of debt dynamics. I also link both to the affordability of debt as measured by debt service ratios (DSRs).
In short, this approach compares the rate of “excess credit growth” with the level of debt penetration in a given economy. The three-year CAGR in debt is compared with the three-year CAGR in nominal GDP to derive a RGF. This is then compared with the level of debt expressed as a percentage of GDP (the debt ratio).
The concept is simple – one would expect relative high levels of excess credit growth in economies where the level of leverage is relatively low and vice versa. Conversely, red flags are raised when excess credit growth continues in economies that exhibit relatively high levels of leverage or when excess credit growth continues beyond previously observed levels.
The key trends
Rolling private sector RGF for all BIS reporting, developed and emerging economies (Source: BIS; CMMP)
In the pre-COVID period, the risks associated with excess credit growth had been declining in developed (DM) and emerging (EM) economies (see chart above illustrating rolling RGF trends). In response to the pandemic, however, credit demand has risen while nominal GDP has fallen sharply. As a result, the RGF (as at the end of 3Q20) for all economies, DM and EM have risen to 3%, 2% and 4% respectively. As can be seen, these levels are elevated but remain below those seen in previous cycles during the past 15 years.
Private sector credit snapshots
Excess PS credit growth versus PS debt ratios as at end 3Q20 (Source: BIS; CMMP)Top ten ranking of private sector RGF by country (Source: BIS; CMMP)
Importantly, out of the top-ten economies experiencing the highest rates of excess private sector credit, six have private sector debt ratios higher than the threshold levels above which debt is considered a constraint to future growth – Singapore, France, Hong Kong, South Korea, Japan and Canada. In the graph above, and in similar ones below, the orange bar indicates where debt ratios exceed the threshold level.
Excess PS credit growth versus PS debt ratios as at end 3Q20 in LATEMEA (Source: BIS; CMMP)
Argentina and Chile have the highest private sector RGFs among the sample of LATEMEA economies. The associated risks are higher in the case of Chile than in Argentina given the two economies debt ratios of 169% GDP and 24% GDP respectively. As highlighted below, the risks in Chile relate primarily to excess growth in the NFC sector.
DSR and deviations from 10-year averages (Source: BIS; CMMP)
Within this subset, the debt service ratios in absolute terms and in relation to respective 10-year averages are also relatively high in France, Hong Kong, South Korea, Japan and Canada despite the low interest rate environment. Outside this subset, affordability risks are relatively high in Sweden, Switzerland and Norway where DSR’s are relatively high in absolute terms and in relation to each economy’s history.
NFC credit snapshots
Excess NFC credit growth versus NFC debt ratios as at end 3Q20 (Source: BIS; CMMP)Top ten ranking of NFC RGF by country (Source: BIS; CMMP)
Similarly, out of the top-ten economies experiencing the highest rates of excess NFC credit, seven have NFC debt ratios above the threshold level (90% GDP) – Singapore, Chile, France, Canada, Japan, South Korea and Switzerland.
DSR and deviations from 10-year averages (Source: BIS; CMMP)
Within this second subset, the debt service ratios in absolute terms and in relation to respective 10-year averages are relatively high in France, Canada, Japan and South Korea. Despite lower rates of excess NFC credit growth affordability risks are also relatively high in Sweden, Norway and the US. (Note that the availability of sector DSRs is more restricted than overall private sector DSRs).
HH credit snapshots
Excess HH credit growth versus HH debt ratios as at end 3Q20 (Source: BIS; CMMP)Top ten ranking of HH RGF by country (Source: BIS; CMMP)
In contrast, out of the top-ten economies experiencing the highest rates of excess HH credit, only two have HH debt ratios above the threshold level – Hong Kong and Singapore. This is not surprising given that HH debt ratios are lower than NFC debt levels in general. Of the 42 BIS reporting countries, 11 have HH debt ratios above the 85% GDP HH threshold level whereas 20 have NFC debt ratios above the 90% GDP NFC threshold level.
Rolling HH RGFs for China and Russia (Source: BIS; CMMP)
That said, experience suggests that the current levels of excess HH credit growth in China and Russia indicate elevated risks, especially in the former economy. In “Too much, too soon?“, posted in November 2019, I highlighted the PBOC’s concerns over HH-sector debt risks – “the debt risks in the HH sector and some low income HHs in some regions are relatively prominent and should be paid attention to.” (PBOC, Financial Stability Report 2019). Excess credit growth remains a key feature nonetheless.
DSR and deviations from 10-year averages (Source: BIS; CMMP)
Within this third subset, the debt service ratio in absolute terms and in relation to respective 10-year averages is relatively high in South Korea. Again, despite lower rates of excess HH credit growth, affordability risks are also relatively high in Sweden and Norway.
Conclusion
This summary post extends the analysis of the level of global debt and debt ratios to include an assessment of the rate of growth in debt and its affordability. Together, these factors provide a more complete picture of the sustainability of current debt trends.
Risks associated with excess credit growth are re-emerging and will be a feature of the post-COVID environment going forward. The two key risks here are: (1) some of the highest rates of excess credit growth are currently occurring in economies where debt levels exceed threshold levels; and (2) affordability risks are increasing within (and outside) this sub-set despite the low interest rate environment.
To some extent, little of this is new news – I have been flagging the same risks in an Asia context for some time – and the implications are the same. Despite recent market moves, the secular support for rates remaining “lower-for-longer” remains, albeit with more elevated sustainability risks in the NFC sector.
Revisiting the level and structure of global debt six months on
The key chart
What are the implications of new highs in global debt and debt ratios? (Source: BIS; CMMP)
The key message
Global debt hit new highs in absolute terms ($211tr) and as a percentage of GDP (277%) at the end of 3Q20, driven largely by government ($79tr) and NFC debt ($81tr).
Public sector and NFC debt ratios both hit new highs above the maximum threshold level that the BIS considers detrimental to future growth.
These trends provide on-going support for the “lower-for-longer” narrative but also raise concerns about sustainability risks in the NFC sector.
The US and China account for nearly 50% of global debt alone and more than 75% with Japan, France, the UK, Germany, Canada and Italy – but only Japan and France are included in the top-ten most indebted global economies.
The post-GFC period of private sector deleveraging/debt stability in advanced economies has ended as the private sector debt ratio increased to 179% GDP.
China’s accumulation of debt has eclipsed the “EM catch-up story”. Chinese debt now accounts for just under 70% of EM debt and EM x China’s share of global debt has remained unchanged over the past decade.
The traditional distinction between advanced/developed markets and emerging markets is increasingly irrelevant/unhelpful, especially when analysing Asian debt dynamics.
New terms of reference are required for analysing global debt trends that distinguish between economies with excess HH and/or corporate debt and the rest of the world. From this more appropriate foundation, further analysis can be made of the growth and affordability of debt…
D…E…B…T, Part II
Breakdown of global debt and trend in debt ratio since 2008 (Source: BIS; CMMP)
Global debt hit new highs in absolute terms and as a percentage of GDP at the end of 3Q20, driven largely by public sector debt and NFC debt. According to the BIS, total debt rose from $193tr at the end of 1Q20 to a new high of $211tr. Within this:
Government, NFC and HH debt all hit new absolute highs of $79tr, $81tr and $51tr respectively
The global debt ratio increased from 246% GDP in 1Q20 to a new high of 278% GDP
The public sector debt ratio increased from 88% GDP to 104% GDP and the NFC debt ratio increased from 96% GDP to 107% GDP over the same period. In both cases, the debt ratio was a new high and above the maximum threshold level of 90% above which the BIS considers the level of debt to become a constraint on future growth
The HH debt ratio also increased from 61% GDP to 67% but remains below its historic peak of 69% (3Q09) and the respective BIS threshold level of 85% GDP.
These trends provide on-going support for the “lower-for-longer” narrative but also raise concerns about sustainability especially in the NFC sector.
3Q20 ranking of BIS reporting economies by total debt and cumulative market share (Source: BIS; CMMP)
The US and China account for nearly 50% of global debt, but neither is ranked in the top-15 most indebted economies. At the end of 3Q20, total debt reached $61tr (29% global debt) in the US and $42tr in China (20% global debt). In absolute terms, these two economies are followed by Japan $21tr, France $10tr, UK $8tr, Germany $8tr, Canada $6tr and Italy $tr. In other words, the US and China account for almost a half of global debt and together with the other six economies account for over three-quarters of global debt. Note, however, that only two of these eight economies rank among the top-ten most indebted global economies (% GDP).
3Q20 ranking of BIS reporting economies by total debt as % GDP (Source: BIS; CMMP)
The post-GFC period of private sector deleveraging/debt stability in advanced economies has ended as the private sector debt ratio rose to 179% GDP, close to its all-time-high. Following the GFC, the private sector debt ratio in advanced economies had fallen from a peak of 181% GDP in 3Q09 to 151% in 1Q15. It had then stabilised at around the 160% of GDP level.
Private sector debt in advanced economies in absolute terms and as % GDP (Source: BIS; CMMP)
As discussed in “Are we there yet?”, this had direct implications for the duration and amplitude of money, credit and business cycles, inflation, policy options and the level of global interest rates. In subsequent posts, I will examine the implications of these recent trends on the sustainability and affordability of private sector debt in advanced economies.
Trends in China’s private sector debt and share of EM private sector debt (Source: BIS; CMMP)
China’s accumulation of debt has eclipsed the “EM catch-up story”. Fifteen years ago, China’s debt was just under $3tr and accounted for 35% of total EM debt. At the end of 3Q20, China’s debt had increased to $33tr to account for 67% of total EM debt. The so-called EM catch-up story is in effect, the story of China’s debt accumulation. Excluding China, EM’s share of global debt in unchanged (12%) over the past decade.
China and EMx China’s share of global debt (Source: BIS; CMMP)
The traditional distinction between advanced/developed markets and emerging markets is increasingly irrelevant/unhelpful, especially when analysing Asian debt dynamics. The BIS classifies Asian reporting countries into two categories: three “advanced” economies (Japan, Australia and NZ) and eight emerging economies (China, Hong Kong, India, Indonesia, Korea, Malaysia, Singapore and Thailand).
Asian NFC and HH debt ratios (Source: BIS; CMMP)
The classification of Japan, Australia and New Zealand as advanced economies is logical but masks different exposures to NFC (Japan) and HH (Australian and New Zealand) debt dynamics.
The remaining grouping is more troublesome as it ignores the wide variations in market structure, growth opportunities, risks and secular challenges. I prefer to consider China, Korea, Hong Kong and Singapore as unique markets. China is unique in terms of the level, structure and drivers of debt and in terms of the PBOC’s policy responses. Korea and Hong Kong stand out for having NFC and HH debt ratios that exceed BIS maximum thresholds. Hong Kong and Singapore are distinguished by their roles as regional financial centres but have different HH debt dynamics. Malaysia and Thailand can be considered intermediate markets which leaves India and Indonesia as genuine emerging markets among Asian reporting countries (see “Sustainable debt dynamics – Asia private sector credit”).
Global NFC and HH debt ratios (Source: BIS; CMMP)
New terms of reference are required for analysing global debt trends that distinguish between economies with excess HH and/or corporate debt and the rest of the world. In this case, excess refers to levels that are above the BIS thresholds. Among the BIS reporting economies (and excluding Luxembourg) there are:
Eight economies with excess HH and NFC debt levels: Hong Kong, Sweden, the Netherlands, Norway, Denmark, Switzerland, Canada and South Korea
Eleven economies with excess NFC debt levels: Ireland, France, China, Belgium, Singapore, Chile, Finland, Japan, Spain, Portugal, and Austria
Three economies with excess HH debt levels: Australia, New Zealand, the UK
The RoW with HH and NFC debt levels below the BIS thresholds
These classifications provide a more appropriate foundation for further analysis of the other, key features of global debt – its rate of growth and its affordability. These will be addressed in subsequent posts.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
