http://www.livemint.com/Companies/I40h0fAFL5FAbO0C1BpqSJ/Fitch-sees-risks-to-sovereign-ratings-from-rising-corporate.html
Mumbai: Rising corporate indebtedness in emerging markets poses potential risks to the sovereign creditworthiness of these economies, Fitch Ratings warned in a study of seven emerging market economies having ratings just a notch above junk.
The countries include Brazil, India, Mexico, Indonesia, Turkey, Russia and South Africa, all of which are rated BBB with either a stable or a negative outlook.
Over the last 10 years, total corporate debt in the seven economies has risen to an average of 71% of gross domestic product (GDP) as of March 2014, from 46% in 2005, the study said.
“The increase in private sector leverage creates a number of risks to sovereign creditworthiness. High private sector debt has often migrated to sovereign balance sheets in past financial crises and so represents a contingent liability to the sovereign,” the study said.
Distress arising out of private sector debt would also lead to an increase in their savings rate as corporate entities seek to repair balance sheets, which in turn could lower economic growth as investments slow, Fitch said. A slowing economy would in turn mar the government’s fiscal balance.
Expected swings in global capital and currency markets due to divergent monetary policies between industrial economies, with the US set for tightening while the European Central Bank is in a stimulus mode, have increased the vulnerabilities of corporate entities in these emerging economies.
Fitch estimates that 24% of corporate debt of the seven emerging market nations is through external borrowings. Rising loan-to-deposit ratios also indicate greater dependence on external financing, the study added.
The global rating agency noted that private sector indebtedness is highest in Brazil, at 93% of gross domestic product, and lowest in Mexico, at 46.6%.
Although corporate indebtedness has begun to worry lenders and regulators alike in India, the country still fares better than most other emerging market peers.
Indian companies’ indebtedness is around 55.2% of GDP, lower than that of their counterparts in Brazil, South Africa and Turkey but higher than that of Indonesia, Mexico and Russia.
Dependence of Indian companies on external borrowings is also low as a percentage of GDP, at just 6.7%. In contrast, overseas debt of companies in Russia, South Africa and Turkey is more than double that of their Indian counterparts.
The study also noted that the pace of growth in the debt of Indian companies was the lowest among the seven nations. Nevertheless, Indian companies remain vulnerable to global market volatilities that are expected as the US Federal Reserve readies to hike rates after a gap of nine years.
Given that bank credit is the chief source of debt for companies, the stress on bank balance sheets is palpable as is evident in Indian banks’ rising bad loans.
Over the past two years, Indian banks’ bad loans have risen by a massive 80% while stressed assets, which includes restructured loans, have risen to 11.06% of total loans as of March, data from the Reserve Bank of India (RBI) shows.
On Tuesday, RBI governor Raghuram Rajan emphasised the need to reduce stress on the books of lenders and said that by 2017 balance sheets would be cleaned up.
Stressed loan books have been a major impediment to the transmission of the RBI’s rate reductions to commercial bank loan rates. Banks are the main source of debt for companies in the other six emerging economies that Fitch studied.
India’s strongest point in the study is its household debt, the lowest at 9% of GDP. Overall, private sector debt is much higher in China than these seven ‘BBB’ range sovereigns, at 185% of GDP at end-2014 (although China data includes ‘aggregate financing’ from the ‘shadow’ banking sector), Fitch said.
However, only 3% of this is external debt, meaning that China is much less exposed to shocks in global capital markets and the authorities have greater scope to manage problems in the domestic banking system.
Comments