Emerging market debts are not at a level that may trigger a market crash, but it is “too soon” to sound the all clear, says Capital Economics.
The idea that emerging market debt may be the next leg from the global financial crisis has been floating around for a long time now. Proponents see emerging market debt as the third domino to fall after the meltdown in the U.S. sub-prime mortgage market in 2008 and also the European sovereign debt crisis in 2011-2012 that saw a near-collapse from the eurozone.
The debt amounts of some emerging market countries such as China happen to be rapidly rising previously decade. Fuelled by low interest, many of these countries have borrowed in U.S. dollars, further creating concern as the greenback’s surge in yesteryear year has increased debt loads.
“These risks shouldn’t be dismissed lightly,” said Julian Jessop, chief global economist at Capital Economics.
Jessop notes that high debts can be managed in emerging market countries at this time because, despite slowing growth in places for example China, emerging economies still register stronger economic growth than the planet. Central banks in the emerging world also have more policy ammunition, as few have undertaken the kind of easing measures developed market central banks have.
So far, Jessop said that only a few emerging market countries face “significant risks,” not yet enough to trigger another global financial trouble. But also, he notes that his firm’s research shows that the rate of change of debt could be more important than the level in determining of debt.
“It is too soon to sound the ‘all clear’,” he explained.