Economics

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.

05/05/2015

Craig Botham

Craig Botham

Emerging Markets Economist

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.

Important information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This article is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored.