October 29, 2012
In the two decades bookmarked by the Mexican debt moratorium of August 1982 and the IMF bailout of Brazil in 2002, emerging economies suffered repeated financial crises. Due to much improved external and public debt positions, sovereign debt and balance-of-payments crises are a thing of the past as far as the EM-10 are concerned.
In the two decades bookmarked by the Mexican debt moratorium of August 1982 and the IMF bailout of Brazil in 2002, emerging economies suffered repeated financial crises. During the 1980s and early 1990s, most major emerging economies defaulted and subsequently restructured their external debt and embarked on a course of broad economic reform. During the 1990s, almost all of the ten largest emerging economies (EM-10) suffered financial crises: India (1991), Mexico (1995), Korea and Indonesia (1997), Russia (1998) and Brazil (1998, 2002). Moreover, Argentina’s sovereign default in 2001 represented the hitherto largest default ever. Only China and Saudi Arabia, among the EM-10, managed to avoid major financial crises during this period.
A number of smaller emerging markets have continued to get into trouble, as recent debt restructurings in the Dominican Republic (2004-05), Ecuador (2008), Ivory Coast (2010) and Belize (2012), or even St. Kitts and Nevis (2012) – to name just a few – demonstrate. But due to much improved external and public debt positions, sovereign debt and balance-of-payments crises are a thing of the past as far as the EM-10 are concerned.
EM-10 government debt has halved from 50% of GDP to 25% since 2000. Meanwhile, G-7 debt has increased to more than 110% of GDP from less than 80%. Indonesia and Saudi Arabia, for instance, saw their debt ratios decline from 95% and 87% of GDP, respectively, to 25% and 8%. Brazil and India are the two countries with the highest government debt ratios at almost 70% of GDP, which is still below the developed countries’ average. Admittedly, if a more comprehensive debt concept (like net public-sector debt) is used, the situation looks more favourable, at least in the case of Brazil, where net debt amounts to less than 40% of GDP. In both cases, nearly all of the debt is denominated in local currency and the bulk is held by residents, further improving the sovereign credit profile.
A similarly important change has taken place as regards the EM-10 external position. (Unweighted) average net external debt – defined as gross external debt minus official reserve assets – has declined from more than 30% of GDP in the late 90s to less than 10% of GDP today. Again, this average admittedly disguises a fair amount of dispersion around the mean. China, for instance, is a net external creditor to the tune of 35% of GDP, while both Turkish and Polish net external debt stands at more than 30% and 40% of GDP, respectively. That said, Turkish and Polish debt ratios look (somewhat) better if foreign holdings of domestic local-currency bonds are excluded.
The EM-10 are currently vastly more integrated into the world economy than a decade (or two) ago. In terms of trade and capital flows, this has made the emerging economies more sensitive to exogenous shocks, as the 2008 global financial crisis or the present eurozone crisis have demonstrated. Nonetheless, improved economic fundamentals have created much greater policy space. Most countries are in a position to respond to growth shocks by way of counter-cyclical macro-policies. Manageable foreign-currency mismatches, indirectly and imperfectly reflected in lower net debt ratios, allow them to absorb a capital account shock through currency depreciation and monetary policy easing. Similarly, generally moderate public debt ratios allow them not only to avoid pro-cyclical fiscal tightening, but also, if necessary, to implement growth-stabilising counter-cyclical policy.
The larger emerging economies have experienced a substantial improvement in their financial position, in relative (to the advanced economies) and absolute terms. As far as government debt dynamics are concerned, the EM-10 stand in marked contrast to the G-7, where government debt is currently projected to peak at almost six times the level of the EM-10 around the middle of the present decade. While the greater integration of the EM-10 into the world economy has made them more sensitive to economic and financial shocks emanating from the global economy, their much improved financial position has made them less vulnerable to the kinds of systemically destabilising crises that characterised so much of the 80s, 90s and early 2000s.
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