28. March 2019, 16:49 Uhr
As the global economy is cooling down considerably and some heavy-weight countries such as Turkey, Germany, the UK or even the US might be heading towards a (mild) recession, it would appear advisable to pay a closer look to international net external debt levels in order to identify potential trouble early on.
Firstly, it is important to survey net rather than gross external debt, for the latter alone would be totally misleading: International creditors with considerable current account surpluses such as the Netherlands, Singapore or Switzerland, for example, sport levels of gross external debt as a ratio of GDP of more than 500 per cent, 450 per cent, and 250 per cent respectively – though either of these are hardly at any risk of an impending balance of payments crisis. That’s simply because they own hefty asset volumes overseas, too, so that their net international investment position (NIIP) or net external debt is far lower; in the case of the three countries named, all of them even net out to positive balances eventually.
NIIPs, secondly, are a very handy initial gauge of potential sources of trouble in the global economy, should credit conditions deteriorate for whatever reason. Initial gauge, because in quite a number of instances the NIIP alone is insufficient to determine the actual risk emanating from the related country’s net debt; other important factors are the size of its current account deficit (or even surplus), the liquidity of its domestic currency as well as its stock of foreign currency reserves, and, yes, the absolute level of its external debt as compared to its debt owed to domestic creditors.
Once all these factors are taken into account, a handful of countries quickly emerge warranting close observation in the near future (see chart).
First of all, there’s Turkey (no surprises here). The country continuously ranks among those emerging markets with particular high exposure to tightening credit; its NIIP hovers in excess of 50 per cent. Obviously, it hence isn’t very helpful for the government to relapse into its bad habits during last year’s exchange rate crisis by instituting capital controls of the sort deterring to international creditors.
Then there’s Indonesia with net external debt at 47 per cent of GDP. Though its GDP is larger than Turkey’s by close to a quarter, that level is still too high for comfort, particularly considering its relatively small foreign exchange reserves (the primary reason why, for instance, India is not mentioned here: Its foreign reserves are almost as high as its entire external debt).
Mexico and Brazil, finally, rank at somewhat lower levels, yet with NIIPs of some 33 per cent of GDP, both are quite vulnerable to sudden contractions of credit, too. That applies to Mexico especially: With its economy roughly half the size of Brazil’s, its gross external debt still amounts close to two thirds of Brazil’s.
In our view, the recent emerging markets bonanza is about to peter out, though not for the reason originally anticipated: Much less than the US Fed luring capital away from riskier borrowers by raising rates, it’s the threat of a severe global economic slowdown with its related contraction of credit which stands to choke capital flows to EM.