You are here: Home » Economy & Policy » News
Business Standard

Perils of debt: Why businesses in emerging markets must tread with caution

A lot of the obligations are denominated in dollars, which makes them harder to pay off when emerging-market currencies depreciate

Mark Whitehouse | Bloomberg 

RBI likely to maintain status quo on rates for entire 2018, say experts

Investors are getting worried about again, and they have at least one good reason: Companies there are more indebted than they were ahead of the last big meltdown a couple decades ago.

A lot has changed since the late 1990s, when a period of credit-fueled growth ended in a wave of defaults and devaluations that swept from Asia through and all the way to Governments have built up big reserves to fend off attacks on their currencies, and they aren’t trying to prop up fixed exchange rates like they did back then.

But one lesson seems to have faded: the perils of After a long period of relative caution, companies are borrowing more for each of shareholders’ equity than they did at any point in the 1990s. Here, for example, is the weighted average debt-to-equity ratio for the 845 companies in the MSCI Index:

One Reason to Worry About Emerging Markets: Mark Whitehouse

And here’s the same measure for the MSCI indexes focused on specific emerging-market countries, for 1997 and 2017:


chart

Such leverage leaves companies vulnerable at a time when rising interest rates are increasing the cost of servicing the -- as Harvard economist Carmen Reinhart recently noted. Worse, a lot of the obligations are denominated in dollars, which makes them harder to pay off when emerging-market currencies depreciate -- as they have been doing in recent weeks.

To be sure, corporate leverage in Brazil and Turkey -- the two leaders -- still isn’t as extreme as it was in Thailand and Indonesia in the 1990s. Also, robust economic growth can make bearable. China, for example, has been showing signs of a long-awaited rebalancing toward consumer-led expansion.

Nonetheless, the burden will make companies much more dependent on things going right, and much less likely to survive if they go wrong.

First Published: Mon, May 21 2018. 08:22 IST
RECOMMENDED FOR YOU