Q: Are you concerned about how fast the emerging debt market has grown in recent years?
A: Somewhat, but I’m perhaps a little less bothered than others because:
1. The increase has been from a very low base.
2. Overall, emerging markets have debt levels relative to both gross domestic product and income that are still considerably lower than those of developed markets.
Market Realist – The graph above shows government debt as a percentage of gross domestic product, or GDP. The graph clearly indicates that debt levels in emerging markets (EEM)(VWO) are much lower than in developed markets (EFA)(VEA). Japan (EWJ), notably, has a very high ratio. Its government debt as high as 2.27 times its GDP. Russia (RSX) has the lowest debt-to-GDP ratio among the major emerging markets at 13.4%, followed by China (FXI), Indonesia (IDX), South Korea (EWY), Brazil (EWZ), and India (EPI), with ratios of 22.4%, 26.1%, 33.8%, 56.8%, and 67.7%, respectively.
Although emerging markets are still worse off compared to their developed counterparts in several fiscal parameters like fiscal deficit, the debt-to-GDP ratio is one parameter where all major emerging countries are ahead of all developed countries. So the fast growth of the debt markets in these emerging countries isn’t really a problem at the moment. It could actually support growth in emerging markets.
Please read the next part of this series to find out whether “frontier markets” should be a part of your portfolio.