Cape Town - Ratings agency Fitch warned on Wednesday that the rapid rise in foreign currency-denominated private sector debt in emerging market countries combined with currency depreciation was increasing risks to their economies.
A new report on eight of the largest emerging market economies estimated that median foreign currency debt of the private sector was 20 percent of GDP in the second quarter of 2015, out of a total of local and foreign currency private sector debt of 90 percent of GDP.
This implies that foreign currency debt in the eight countries - Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey - accounted for 22 percent of total debt. The definition of private sector debt used includes domestic bank credit to households and companies, securities issued in the domestic and international markets and other external debt of the corporate sector.
Foreign currency debt was highest as a share of GDP in Turkey, at 41 percent, and Russia, at 37 percent, and lowest in China, at 10 percent of GDP, and India, at 17 percent.
The agency estimates that currency depreciation between June 2015 and March 2016 would have raised the private sector foreign currency debt burden by around a further 8 percent of GDP in Russia, 4 percent in Brazil and South Africa, and 2 percent in Turkey and Mexico.
Debt denominated in foreign currency is more risky than local currency debt because exchange rate depreciation raises the cost of servicing it.
Fitch noted that currency risk can exacerbate times of economic stress as this is when depreciation pressure often emerges.
The agency also warned that private sector debt, particularly for state-owned enterprises, can migrate to the sovereign balance sheet.
– African News Agency