Emerging Asia to power global growth
Emerging countries in general, and those from Asia in particular, have been key drivers of global economic growth. To continue at this pace, it is understandable that these nations would be borrowing – both domestically and overseas.
In this article, our reference is specifically to private debt as it directly impacts companies and households rather than government debt. The graph below, made available by BMI Research, shows private debt as a percentage of a nation’s GDP (gross domestic product).
High on indebtedness
Among the top five most indebted emerging nations, four are from Asia with Hungary being the lone representative from Europe. Brazil, at number ten, is the most indebted nation from Latin America.
China (FXI) leads the pack, with private debt close to 210% of its economic output. South Korea (EWY) is a close second at ~190% with Malaysia (EWM) and Thailand (THD) following at ~140% and 130% respectively.
Importantly, over half of Thailand’s debt comes from households with South Korea and Malaysia also carrying high amounts of household debt.
Why is this important?
Though a sizable portion of the non-financial corporate debt shown in the graph above has been raised domestically, these nations cannot remain immune to the impact of tighter monetary policy in the US as far as the overseas portion of the corporate debt is concerned.
A tighter monetary policy usually leads to a stronger domestic currency when coupled with robust economic growth. Given that the US Federal Reserve is expected to increase the federal funds rate two more times this year, the greenback (UUP) may strengthen, thus making dollar-denominated debt held by firms in emerging Asia more expensive to service. This will reflect on the bottom-line of local companies, thus affecting their stock price.
In the next article, let’s assess whether these debt levels, in light of monetary tightening in the US, should be causes of concern for investors invested in emerging Asia.