In the emerging world as a whole, debt as a percentage of GDP increased from 99% in 2008 to 125% now. This increase is substantial in historical comparison, especially considering that it is an average. Some countries, like India, Taiwan and Mexico, have had modest credit growth. But then in other countries, the level of debt in the economy has vastly increased. They are struggling with serious imbalances that could hurt the banking sector in the coming years. Five countries stick out: Thailand, Malaysia, Brazil, Turkey and China.

China is a special case. The explosive credit growth was mainly used for infrastructure investments by local authorities and other investments by the semi-public sector. In Brazil it has been a combination of funds for large projects, particularly in the energy sector, and consumer loans. In the other three countries it mainly involved consumer loans. But what all five countries have in common is that excessive credit growth was possible thanks to years of strong foreign capital inflows. Because of the ultra-low interest rates in the United States and Europe and the, back then, high growth prospects in the emerging world, foreign speculative investments broke record after record. This was especially true in the years 2006-2011.

Meanwhile, capital flows have turned negative. In the past four quarters, investors pulled out over USD 700 billion from the emerging world. This is explained by nervousness about rising interest rates in the US and concerns about growth in China and other important emerging markets. As long as this situation persists, the high credit growth of recent years simply cannot be maintained. In Thailand, the correction has already started. In the other countries the problem is ignored or underestimated, so that the risks will increase even further.

Turkey is the most vulnerable. This country’s credit growth remains at 20%. Meanwhile, it has a current account deficit of 6% of GDP. The worst part is that the Turkish banking sector is mainly financed with foreign capital. Given the recent flight of capital from the emerging world and the great political uncertainty in Turkey, it could well be a lot more difficult for Turkish banks to raise capital. A strong credit correction seems inevitable.


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