Should we worry about emerging market debt levels?
June 2018
Patrick Zweifel, Chief Economist
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How does EM debt in 2018 compare to 2009?
Rising indebtedness?
Emerging markets continue to have lower levels of debt than developed markets as a percentage of GDP. But as the chart below shows, from 2009 emerging markets have increased their levels of indebtedness to reach 183% of GDP according to latest available figures. What has driven this increase?
As is often the case, the answer is China. Strip it out and the level of indebtedness of emerging markets has barely budged for 20 years. This is a positive fundamental consideration for investors.
China's corporate debt is the main factor
Digging into the composition of emerging market debt unveils a similar insight: most of the increase has come from corporate debt in China. By contrast, public (sovereign) debt or household debt has remained fairly flat.
The wave of Chinese corporate debt issuance over the past decade is observable in the chart below. The only market that has come close over this period is Turkey.
Fig. 3 - EM corporate debt change by MarkET
Q2 2009-Q3 2017
Source: Pictet Asset Management, BIS, CEIC, Datastream
Is this a problem? Although the size of China's corporate debt sector has been noted as a source of systemic global risk by policymakers, we do not feel the bubble is likely to burst. Firstly, excess corporate debt aside, China's macroeconomic fundamentals are broadly in good health. We expect an orderly, managed corporate deleveraging over a period of years, which will admittedly weigh on overall growth. Second, much of the debt is issued by state-owned enterprises (SOEs), which are quasi-sovereign and can be considered as being bank-rolled by the Chinese goverment.
THE VIEW FROM OUR EMERGING CORPORATE BONDS TEAM
Karen Lam, Senior Client Portfolio Manager
In the Chinese corporate market, we feel our investment opportunities are mainly in the external (US dollar denominated) space. That's not to say we don't occasionally look at renminbi debt, but we do not currently have any RMB corporate bond exposure in our portfolios.
As shown below, China is expected to remain a significant contributor to gross issuance in external debt in 2018.
Fig. 4 - EM Corporate External Bonds
2018 supply forecast by region
Source: JP Morgan 09.05.2018
China now accounts for 42% of short-dated EM credit issuance compared to 18% five years ago. Most of this is focused on two sectors: real estate and financial services.
In our view, short-dated credits issued in the former are not attractive. This is because China real estate developers have been willing to pay up to get their debt issued, given their refinancing needs and time limits on regulatory approval, which in turn has put pressure on the secondary market. In relative terms, we therefore prefer select short-dated Chinese credits in financial services when the bottom-up fundamentals stack up.
MARKET WATCH
MARKET WATCH DATA
31.05.2018
Source: Datastream, Bloomberg, data as at 31.05.2018 and in USD. Equity indices are quoted on a net dividend reinvested basis; bond and commodity indices are quoted on a total return basis. The currency rates evolution is treated as a performance calculation based on FX rates.
About
Patrick Zweifel
About
Patrick Zweifel
Patrick Zweifel joined Pictet in 1997. He is Chief Economist at Pictet Asset Management. Before assuming his current position in 2009, he was head of the “Macro Research Team” at Pictet Private Wealth Management. In particular, he had economic research responsibility for emerging markets and Japan, and for the development of quantitative models on major asset classes, primarily foreign exchange models. Before joining Pictet he was a research assistant in econometrics and monetary theory and worked on international research projects for the World Bank and the European Union. He holds a PhD in econometrics from the University of Lausanne.
About
Karen Lam
About
Karen Lam
Karen Lam joined Pictet Asset Management in 2013 as a Senior Client Portfolio Manager in the Fixed Income Emerging Corporate team and is based in London.
Prior to joining Pictet Asset Management, Karen was an Executive Director at J.P. Morgan Asset Management working as a global rates portfolio manager and later as a senior client portfolio manager covering fixed income total return strategies and emerging market debt funds. Previously, Karen was the lead manager research analyst at J.P. Morgan Private Bank covering fixed income funds.
Karen holds an MBA from the University of Chicago Booth School of Business and an MSc in Epidemiology from Imperial College London.
China's onshore renminbi-denominated bond market is an emerging asset...
Cary Yeung, Head of Greater China DebtJanuary 2019
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