Emerging markets: Corporates at risk
Schroders Emerging Markets Economist Craig Botham takes a look at countries, including Turkey and China, facing potential issues from the toxic combination of rising corporate debt and falling profits.
Slowing growth and rising credit since the crisis raises questions over emerging market corporate credit. Beyond concerns about China, Turkish corporates also look highly risky.
Emerging market sovereigns are in a much healthier position today to withstand this year’s looming Federal Reserve’s interest rate hike. However, heavily-indebted corporate sectors are a concern.
The curious case of climbing corporate debt and deteriorating profits
Not only has corporate debt been climbing rapidly in emerging markets as a whole, some countries (including China and Turkey) have also seen sizeable increases in foreign currency debt, which poses additional risks.
Furthermore, corporate profits are deteriorating in those economies which have seen a considerable run-up in private sector debt, which raises concerns about their ability to service this debt.
Turkish corporates among the most exposed
We are particularly concerned about Turkish corporates at the moment, given their indebtedness, while China continues to generate fears about financial stability.
Other economies, particularly in Latin America, have also increased in riskiness since the crisis, but are, it seems, better off than Turkey.
Further, given the relatively low foreign currency reserves held by Turkey, authorities lack the policy space to respond to any downturn while China and even the Latin American countries look more resilient.
Consequently, not only do Turkish corporates look to be amongst the most exposed, but the economy itself is also most at risk in the event of a credit shock.
Added to the country’s other balance sheet problems, the central bank faces a difficult task.