uploads///Emerging Markets Are in a Much Better Fiscal Shape than the Developed Ones

Emerging Markets Are in Good Fiscal Shape

By

Jun. 23 2015, Updated 2:28 p.m. ET

Over the past few weeks, I’ve been talking about a shift from developed to emerging markets, given slow economic growth and sovereign debt problems in many major developed market countries.

Earlier this week, I expanded my view—given recent market volatility, many of the emerging markets that were viewed as risky or even dangerous a mere 15 years ago now appear to be more attractive than many developed countries, based on their fiscal situations.

Article continues below advertisement

Market Realist – Some emerging markets are in good fiscal shape.

As you can see in the graph above, emerging markets (EEM) carry far less fiscal baggage than their developed counterparts (EFA). Most major emerging markets have smaller debt-to-GDP (gross domestic product) ratios than developed markets. The United Kingdom, France, and the United States’ debt levels are close to their GDP. Meanwhile, Japan’s (EWJ) debt is more than twice its GDP level.

Within the major emerging markets, India (EPI) has a relatively high debt-to-GDP ratio of 65.5%. India’s ratio is lower than Germany’s (EWG), which is 76.9%–one of the less leveraged developed economies.

Russia’s (RSX) debt-to-GDP ratio is the lowest among major economies at 14.0%. However, the Russian government is likely to issue more debt over the coming years in order to build stadiums for the FIFA World Cup in 2018.

Higher debt means that governments have to spend more on servicing debt, especially when interest rates are increasing. This means a government can spend less on other things, which would be a drag on the country’s economy. Lower debt-to-GDP ratios give emerging market governments more leeway to spend compared to their developed market counterparts.

Also, some emerging markets like China (FXI) and South Korea (EWY) have positive current account balances, which means the rate hike in the United States shouldn’t hurt their currencies much.

Advertisement

More From Market Realist

  • Open sign on a sidewalk
    Macroeconomic Analysis
    Top Reopening Stocks to Play the Shifting Market Sentiment
  • Morgan Stanley sign and stock numbers
    Macroeconomic Analysis
    Morgan Stanley's Buyback Stock Picks in 2021
  • Black Wall Street sign is sign of ethical investing
    Macroeconomic Analysis
    Ethical Investing Stocks and Funds for Your 2021 Portfolio
  • New York City skyline and Goldman Sachs logo
    Macroeconomic Analysis
    Goldman Sachs: Options Trade Picks to Play Earnings Season Volatility
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.