Emerging Economies’ Public debt is increasing, but its composition is improving

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Bankia Estudios | At end-2016, the emerging economies’ public debt rose to 11.7 trillion dollars, double the level of 2007, reaching 51% of GDP, according to a report from the Bank for International Settlements (BIS).

Brazil, China and India are the economies which hold most of this debt, with almost 8 trillion dollars. How this debt is made up has been changing over the last few years as the countries’ financial needs have increased: debt issuances have become more important at the expense of bank credit. The former now account for 80% of total debt, compared with 62% in 2002, and most of it is in local currency.

The central government is the biggest issuer of debt, representing, on average, about 75% of total public debt. But there are two important exceptions: in China and India almost 65% of total public debt is generated in public administrations unrelated to central government. The BIS focuses its analysis on the central government’s debt, given its importance on an aggregated level, and excludes China and India.

As a result, the BIS estimates that the emerging central governments’ debt stands at some 4.4 trillion dollars (excluding China and India). Only 14% of this is denominated in foreign currency (over 32% in 2001), with the dollar being the dominant currency (almost 67%), followed by the euro ( a little over 22%). Although issuances in foreign currency have been losing importance in favour of local currency issuances, they still make up an important part of central government debt in some economies: 35% in Saudi Arabia, 32% in Turkey, 30% in Indonesia and Poland and 27% in Mexico. In nominal terms, Mexico is the biggest issuer in foreign currency in the world (some 67 billion dollars at end-2016). Turkey comes a close second and has also shown a clear upward trend in this type of issuances since 2001 (64 billion dollars in 2016 compared with 15 billion in 2001).

Another factor which is worth highlighting is the significant increase in the average maturity, 7,7 years, of the central governments’ debt, similar to that in the advanced economies. Countries like Mexico, the Philippines and Korea have doubled the duration of their debt portfolios over the last decade to around 8 years. Amongst the countries with the longest maturity, South Africa stands out with 16 years, followed by Peru and Chile (over 13 years), Thailand (almost 11 years) and Indonesia (a little over 9 years). This is well above the existing maturity in the debt portfolios of some of the biggest advanced economies: around 6,5 years in Canada, Germany or Spain and some 5,6 years in the US.

This increase in the duration of the debt is the result of the rise in issuance of securities with a fixed interest rate, which already represented over 75% at end-2016, compared with 60% in 1999 (90% in the advanced economies). In Malaysia, Thailand and Singapore, 100% of debt issued is at a fixed rate and Chile has gone from zero to 40% in under 10 years. There has also been an important development in terms of inflation-linked issuances, given the backdrop of low inflation we have experienced, in general, over the last few years. The countries where this type of debt is more usual include Brazil (34%), South Africa (27%) and Mexico (24%).

On balance, the emerging economies are also increasing their indebtedness. But they still have better ratios than the advanced economies (in terms of GDP, 51% compared with over 80%). Whatsmore, the changes in the composition of the emerging economies’ debt has reduced the risk fuelled by market volatility at times of increased uncertainty.