Fitch Warns Emerging Markets of Brazil-Like Mess on Debt

  • Borrowings by households, companies will surge to 77% of GDP
  • Burgeoning private debt clouds creditworthiness, banks' health

As if political turmoil, commodity-price meltdown and growth hiccups aren’t enough, emerging markets face a threat to their creditworthiness from an entirely different area -- the burgeoning debt of households and companies.

Private-sector borrowing as a proportion of gross domestic product will reach 77 percent by the end of this year in seven large developing nations, Fitch Ratings said in a report Wednesday. Such liabilities have exceeded government debt levels, exposing their economies and financial systems to “downside risks,” London-based analysts Ed Parker and James McCormack said.

The countries -- Brazil, Russia, India, Indonesia, South Africa, Turkey and Mexico -- are seeing an increase in their private-debt burden in 2015 because of currency depreciation, according to the report. That may weigh on their governments’ credit ratings through weaker GDP growth, worsening budget deficits, pressure on foreign-currency reserves or further exchange-rate fluctuations, Fitch said.

“Private-sector debt has often migrated to sovereign balance sheets in past financial crises,” the analysts wrote. “A stress situation could feed through to pressure on sovereign creditworthiness.”

Brazil Situation

Among the countries studied by Fitch, Brazil had the highest proportion of private borrowings relative to GDP, at 93 percent, and Mexico had the lowest, at 47 percent. The increase between 2005 and 2014 was also the greatest in Brazil. The country was downgraded to junk at Standard & Poor’s in September.

“The challenges facing Brazil partly reflect the rapid rise and level of private sector debt, and highlight downside risks to other countries,” Fitch analysts said. 

Brazilian shares have tumbled 23 percent from their peak in May as the government struggles to avoid further credit-rating downgrades amid prospects for the longest recession since the 1930s. A corruption probe has caused political gridlock, delaying President Dilma Rousseff’s efforts to fortify fiscal accounts and revive confidence. The central bank has raised borrowing costs to the highest since 2006, depressing demand and boosting unemployment, while failing to tame double-digit inflation. The real is heading for the worst performance among emerging-market peers in 2015.

Of the seven countries studied, all except Mexico have either BBB- or BBB ratings with a negative outlook and are therefore close to the junk threshold, according to Fitch. Domestic banks in these nations were the primary source of lending, it said.

“They would face risks of increased non-performing loans, weaker profitability and potentially the need for recapitalization in the event of a systemic crisis affecting corporates or households.”

China was excluded from the group because its data would skew overall figures for emerging markets, it said.

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