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.


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

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document 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 Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. 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 guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.