The Debt Pile’s Pile-On Plume

Government and private sector debt accumulation acting as a global growth drag was a G-20 summit topic focus in Argentina, where the Macri Administration’s external market return after a decade in the wilderness again dug a hole requiring IMF rescue. Participants registered concern as efforts to establish a comprehensive member data base again assumed importance, but attention mostly veered toward China’s deleveraging course amid US trade and investment caution and tariff imposition. Both sides backed a three-month cooling off period, but Washington has extended the fight into national security and aid financing, with vows to curb Chines defense and technology access and challenge and match infrastructure and development deals under the Belt and Road program with establishment of a new agency. JP Morgan’s annual update puts government debt/GDP outside China at 50%, almost a record, with the private load equally near an historic peak. Fiscal deficits above the 3% standard cutoff will result in 90-100%-plus levels in relation to output in Argentina as well as Egypt, Jamaica and Mongolia, and 5-10 point increases the past year were in Angola and Ecuador.  The bank argues that the foreign exchange and bonded components of external debt are the main vulnerability metrics, with Bahrain and Uruguay in trouble on these counts. Debt/ reserve ratios above 1 also mean difficulty for Pakistan and Ukraine. With China private debt/GDP is close to 115% and excluding it the figure is 75%. China’s level rose by the same 75% the past decade, with corporate borrowing up the most. The household 37% debt average is half the developed world, but Korea’s and Malaysia’s total mirrors the latter group. Asia overall has the top private credit portions outstanding, while reductions since last year were in Saudi Arabia, Kazakhstan, Croatia and South Africa.

Local currency exposure is almost 95%, mostly through commercial bank loans rather than capital markets. Since 2015 the overhang has been a concern that will now worsen with the global business end- cycle coinciding with worldwide rate hikes. In the government ledger, 90% is domestic, but non-residents own one-quarter of the amount and 30 new chiefly frontier sovereigns have debuted since 2010. A combination of tighter liquidity and commodity prices will widen bond spreads in this segment, according to the survey. Private credit doubts center on China, where a crackdown has relented with slower 6.5% growth and Washington’s trade test. A spike in bad loans is likely throughout the universe with Turkey’s crisis offering a precedent, and the traded corporate bond size of $2 trillion is a large number even if an estimated half is held by local investors.  In Asia especially 1200 first time issuers the past decade may be in peril with more defaults as economic and cash flow indicators deteriorate. Based on empirical data half a dozen countries are in serious danger, and most have already turned to the IMF, including Argentina, Mongolia, Pakistan and Zambia. Stock markets through November reflected the same negative sentiment, with the MSCI core and frontier indices down 15%. Argentina and Pakistan with respective 45% and 30% drops were big losers, with only a handful of Middle East entries with strong results as commodity windfalls service debt and equity allocation.