Latin America’s corporate debt to foreign creditors (external debt) has been growing at an alarming rate, particularly in Brazil and Mexico.
At 48% at the end of 2015, the region had the second highest average ratio of external debt to GDP, compared to 78% in emerging Europe, 47% for Asia Pacific, and 43% for the Middle East & Africa, according to a report by U.S. ratings agency Moody’s.
In emerging markets across the world, private debt is growing faster than public debt. Since 2005, private sector external debt has grown at an annual rate of 14.3% compared to 5.9% growth rate for public sector debt, says Moody’s.
Worse still, some Latin American countries are seeing their external debt growing faster than GDP and foreign exchange reserves.
Debt is growing faster in Brazil than in the region as a whole, pushing the country’s external debt to GDP ratio to 38% in 2015 from 22% in 2005. While this is still a relatively low level in the global context, the ratio will continue growing if Brazil’s economy contracts any further.
Real estate debt is hitting Brazilian banks hard, with many property developers abandoning their projects halfway through due to credit crunch.
For Latin American firms, debt poses a greater threat, largely because they borrowed in U.S. dollars. Now that their local currencies have been devalued, they may end up having to pay a lot more than they actually owed.
Moody’s expects commodity prices will stay low for several years to come. This may deal another blow to the regional economies, most of which are fueled by commodity exports.
The debt situation may be exacerbated if the United States raises interest rates, prompting investors to abandon risky assets (stocks) in exchange for U.S. sovereign bonds.
“Even though developments differ by country, these trends show that emerging and frontier markets are now more susceptible to economy-wide crises than they were a few years ago,” said Elena Duggar, Associate Managing Director at Moody’s.