Emerging markets could cause next financial crisis

by Saengwit Kewaleewongsatorn

Debt in private sector of the emerging countries has reached the highest rate across the world, which may be caused by the nearly decade low interest rates and the impact of quantitative easing approach.

As the data from the World Bank 2014, it shows the level of the private sector debt to Gross Domestic Product (GDP), which the red level appears across the globe, including the North America, Latin America, East Asia, Southeast Asia and Australia.

Interestingly, the private sector debt to GDP of emerging markets has ranked the top table including China, Thailand, Turkey, Brazil Indonesia, Malaysia, Saudi Arabia, Mexico and Russia. While the private debt of countries facing the financial crisis in 2008 remain high, which include the US, United Kingdom, Cyprus, Greece, Spain and Portugal.

This situation is in line with the analysis from the International Monetary Fund (IMF), saying the next financial crisis could be happened from the mounting private debt from the emerging markets due to the ultra-low borrowing costs. While electronically printing money has flooded out into emerging markets, which inflated asset bubbles, encouraging companies and government to take advantage of unusually low borrowing costs and load up on debt.

The IMF found that the balance sheet have become thinner in many emerging market companies and banks, warning these firms have become more sensitive to financial stress.

While the latest Fed interest rates hike on Dec 15 might fuel the crisis to be clearer as the companies would shoulder more borrowing costs than the past while the global economy is in turmoil, particularly the China’s new normal, which its growth is in slower pace.

The Asian financial crisis was occurred in 1997 with a series of currency devaluations. The crisis started in Thailand due to the increasing foreign debt that made the country effectively bankrupt. The crisis also spread to other Asian countries including stock market devaluation and a precipitous rise in private debt.