Debt risks in emerging market countries are rising, and China and the United States are discussing new measures to prevent a "wave of defaults" on debt in emerging sovereign markets, according to **.
According to a report released by the Institute of International Finance (IIF), in 2023, the scale of global debt (including countries, enterprises and households) will reach 313 trillion US dollars, a record high, and the global debt scale will account for more than 300% of GDP.
Over the past 20 years, global debt has grown significantly faster than GDP. According to the United Nations Global Crisis Response Team, global public debt has more than tripled since 2000. Global GDP grew only threefold over the same period.
Compared with developed countries, some emerging market countries are facing severe debt repayment pressures due to factors such as high borrowing costs and exchange rate depreciation. European and American commercial banks have provided large amounts of borrowing to emerging market countries, and the potential risk has risen.
Debt risks in emerging market countries are rising
In 2023, the debt-to-gross domestic product (GDP) ratio of emerging market countries hit new highs, with countries such as India, Argentina, Russia, Malaysia, and South Africa seeing the largest increases in debt, and the debt stress index surpassed its 2021 highs.
In stark contrast to developed countries, 62 per cent of external public debt in emerging market countries comes from private creditors, making borrowing costs higher and restructuring processes more complex. For example, the average borrowing rate in African countries is four times that of the United States and eight times that of Germany.
From 2010 to 2022, the interest expense of developing countries' national debt as a percentage of GDP increased from 09% rises to 15 per cent, 19 developing countries have higher interest payments on their national debt than they spend on education; Forty-five countries are above health spending, and 3.3 billion people live in these countries.
The depreciation of the currencies of emerging market countries has increased the pressure to service dollar debt. Since 2022, the US has raised interest rates 11 times in a row, which has led to the appreciation of the US dollar, triggering a sharp depreciation of the currencies of many emerging market countries, and the risk of US dollar debt has increased.
The World Bank has symmetrically warned that high interest rates exacerbate debt risks, and that a number of potential economic headwinds could be the trigger for a debt default.
European and American commercial banks have provided large amounts of borrowing to emerging market countries, and the potential risk has risen.
In the growth of external debt in developing countries, loans from the private financial sector in the United States and other Western countries have grown rapidly, including loans from the bond market and commercial banks, which have far outpaced those of multilateral financial institutions and Chinese financial institutions. According to the World Bank's international debt statistics, Latin America became the region with the highest debt ratio in the world in 2020, and its external debt mainly comes from the international financial market, with Wall Street and commercial banks in the United States and Europe being the main financiers.
At the same time, both China and the United States have large amounts of assets (including investments) overseas, which could be affected by a debt crisis in emerging market countries that triggers financial turmoil.
The core part of the International Investment Position Table, the "Net Investment Position", refers to the difference between investments and liabilities. When the total amount of foreign investment in a country is higher than the overseas capital introduced, it belongs to the creditor country; Otherwise, it belongs to the debtor country.
According to the "International Investment Position Table" released by the People's Bank of China, as of the end of June 2023, the total assets invested by Chinese enterprises, organizations, residents and other departments in other countries and regions are 9$367 trillion. Although China has introduced a large amount of foreign investment, the capital invested overseas by China is "actually higher than the foreign capital introduced".
China's international net investment position is about 2$5 trillion, making it one of the largest creditors in the world and developing countries. According to the World Bank, China's lending to developing countries has quadrupled since 2010 to more than $170 billion.
According to the "International Investment Position Table" released by the U.S. Department of Commerce, the total assets of U.S.**, enterprises, institutions, organizations and individuals abroad exceed 33$58 trillion. But at the same time, the cumulative amount of investment in the United States by other countries and regions is as high as 51$58 trillion. The U.S. has a net international investment position of "-$18 trillion" and is therefore considered the world's largest net debtor.
If emerging country debt risks spread, it could increase the debt risks of the United States itself. Currently, the ratio of total debt (including countries, businesses, and households) to GDP in the United States is as high as 350%, which is significantly higher than the global average. In the fourth quarter of 2023, the annualized interest expense of the U.S. federal debt exceeded $1 trillion, and the interest expense of the national debt as a percentage of GDP far exceeded that of emerging market countries.
Therefore, against this backdrop, the United States needs to strengthen cooperation with China to prevent a "wave of defaults" on debt in emerging sovereign markets.